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Solid Q2 results, Festive season to drive growth

Hero MotoCorp (HMCL) is India’s leading two-wheeler manufacturer, with nearly 32% share of the domestic motorcycle market in volume terms. The company has eight manufacturing facilities  -  six in India and one each in Colombia and Bangladesh.

* In Q2FY25, Hero MotoCorp's standalone revenue increased 10.8% YoY to Rs. 10,463cr, driven by a 7.3% rise in sales volume and higher average selling prices due to better product mix.

* The company’s parts, accessories and merchandise business saw a record high revenue of Rs. 1,456cr, up 7.5% YoY, contributing 13.9% to its total revenue.

* EBITDA rose 14.1% YoY to Rs. 1,516cr, primarily driven by lower material costs and product mix improvement. EBITDA margin increased 40bps YoY to 14.5%, despite a 200bps impact from electric vehicle (EV) operational expenses. The ICE segment EBITDA margin improved 160bps to 16.5%. The management reaffirmed its overall EBITDA margin guidance at 14-16%.

* During the 32-day festival season, the company achieved a record 1.6 million unit sales, resulting in a 16% YoY revenue increase. Its Vahan market share rose to 31.6% during the period.

Outlook & Valuation

HMCL delivered robust financial performance, with strong domestic market position and growing EV business. With a ~32% market share in the domestic motorcycle market, the company is poised to capitalise on positive customer sentiment, the festival season and the upcoming wedding season. Its EV business is gaining momentum, with a ~6% market share and plans to expand into more affordable price segments. Furthermore, HMCL's entry into Southeast Asia and planned expansion into Europe and the UK are expected to drive growth in its global business. The company's upcoming new model launches, brand strengthening and pricing strategies in both ICE and EV categories are also expected to contribute to its growth. Therefore, we reiterate our BUY rating on the stock with a target price of Rs. 5,269, based on 20x FY26E adjusted EPS.

Key highlights

* Premium motorcycles: Expanding the portfolio by introducing new models such as the Xpulse 210 (liquid-cooled) and Xtreme 250R while strengthening existing brands such as the Xtreme 160 and Karizma XMR 250. The goal is to grow the existing premium brands by offering a broader range of models.

* ICE scooters: Refreshing the scooter lineup with updates like a full-body change for the Destini and expanding the Xoom series to include 125cc and 160cc models. These launches are planned before March 2025.

* EVs: Expanding into more affordable price segments after initially focusing on premium EVs. The strategy is to cover a wider price range in the EV segment to meet growing demand.

* Hero MotoCorp plans to expand to Europe and the UK from H2FY25, starting with the VIDA Z electric scooter and later introducing premium motorcycles. The company’s tech centre in Germany and MotoSports Team Rally support this plan. It has already partnered with distributors in Italy, Spain, France and the UK to meet the market demand.

* In the festival season, HMCL achieved a finance penetration of 66%, with Hero FinCorp Ltd (HFCL) accounting for 26% of the financing. HFCL's loan book grew 16% YoY in Q2FY25, despite rising delinquency rates and credit costs negatively affected the profitability.

* Rural and urban regions have seen healthy participation in the festival season sales, with rural areas growing faster than urban markets. Both regions experienced double-digit growth. The upcoming marriage season is expected to sustain demand momentum beyond the festival season.

* HMCL has expanded into Southeast Asia by launching operations in the Philippines. The company has achieved a 30% YTD sales growth in its global business.

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