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Better growth visibility driven by recovery in 2W demand

Growth strategies in place for expansion in premium and EV segments

? Domestic 2W demand witnessed a strong rebound during the festival period, reporting record volumes of 2.2m units (+22% YoY) during the 33-days period. Normally, growth tends to slow down after the festivals, but this year it has continued well beyond that period. This is partly due to the strong demand in the marriage season, especially in the central and northern regions.

? This, we believe, should benefit HMCL the most, as it has a strong presence in states like UP (~54% market share), Rajasthan (~58%), MP (~42%) and Bihar (~45%). These states collectively contribute ~35% of the domestic 2W demand. The ongoing growth momentum should ensure an expansion in HMCL’s core 100CC/110CC portfolio, which contributes ~80% of its overall volumes.

? Recovery in its core product portfolio, coupled with its well-planned strategy to expand in both premium and electric vehicles (EVs) make HMCL better placed in the 2W OEM space. To account for this, we have increased the target multiple for HMCL. We now value it at 18x Dec’25E EPS (vs. 16x Sep’25E EPS earlier). Additionally, we assign INR231/INR74 to Hero FinCorp/Ather after applying a 20% holding company discount). We, therefore, arrive at our TP of INR4,480. Reiterate BUY.

HMCL to be the major beneficiary of recovery in domestic demand

? Witnessed signs of improvement in 1HFY24: Demand picked up gradually in 1HFY24 as volumes grew ~4% YoY. This was driven by stable demand in the urban areas, while rural areas too showed signs of improvement, largely led by healthy festive demand. The 2W segment reported record sales of 2.2m units (+22% YoY) during the 33-days festive period this year.

? Demand momentum likely to sustain further in 2HFY24: Gradual rural recovery and ongoing wedding period demand is further expected to drive the growth momentum. The marriage season typically accounts for 20-25% of the total demand, particularly in key states such as Uttar Pradesh, Madhya Pradesh, Rajasthan, and Bihar. Hence, this becomes significant for the overall growth of the 2W industry as these states together contribute ~35% of the domestic 2W demand.

? HMCL’s core product segment last to recover, yet far away from FY19 peak: With demand picking up in key motorcycling states, growth has begun to return in the 100cc segment, leading to an increase in the product mix to ~12.8% of the domestic industry until Oct’23 (vs. 12.4% in FY23). However, it is still far behind its FY19 mix of ~19%. We believe that the sustained growth in both the 100cc and 110cc categories will benefit HMCL the most, as they contribute ~19%/61% to HMCL’s overall volumes respectively.

? The 2W segment has a better scope of growth vis-à-vis other segments: During FY23-26E, 2Ws are expected to experience relatively stronger growth due to improving demand sentiments. This is further supported by their weaker recovery over the last two years, resulting in a lower base. This should be followed by a gradual, but orderly, rebound in exports. We anticipate a 9- 11% CAGR for the segment from FY23 to FY26.

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