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Hero Motocorp Ltd (Hero) reported strong set of numbers in Q3 FY24 with the 2W industry in a sweet spot. Volumes grew by 17.8% yoy and 3.1% qoq as 2W segment saw a gradual sequential pick-up in growth post a dull FY 23. Topline grew by 21% yoy on 3% yoy growth in ASPs and better product mix. Net realizations remained flattish to ?66.6K. The spares business also supported the cause as they had a good growth of 13% yoy and 8% qoq to ?14 bn. The retail demand in Q3 witnessed a solid growth on the back of array of XTech launches (30% of volumes currently), pick up in rural demand and various variants launches in different segments. Input costs to sales ratio in Q3 were at 67.3%, down from 69.4% yoy and 68.6% qoq as commodity costs softened. Other expenses to sales moved up to 12.6% from 12.3% yoy on higher EV expenses, expansion in dealerships, new launches etc. EBITDA margins were sequentially down by just 10 bps and up by 250bps at 14% supported by the input cost benefits, LEAP-2 benefits, operating leverage and product mix tilted towards high margin premium products. However, margins were dragged by 200 bps because of EV products and related expenses. As depreciation expenses rose 13% yoy and 4.4% qoq, and other income grew by 32% yoy, PBT grew by 51% yoy while PAT too grew by 51% yoy at ?10.73 bn, a sequential growth of 2%.

Volumes to grow at a robust pace from FY25 on launches in the premium segment,
EVs and scooters

The company is gaining strength through the XTech (Extra Technology) variant expansion across its brands (30% of current demand) seen in Q3. In the premium bikes segment, the company attained market share of higher single digits on the back of the launches of X-treme 160R and X-Pulse 200T bikes. Going forward, the intrinsic growth drivers are expected to remain intact with the rural markets showing good growth in the key markets of North, Central and East through Hero’s mass segment bike HF Deluxe showing a double digit growth. Demand for Hero’s newly launched Xtreme 125 cc is very encouraging, while the existing portfolio of the Super Splendor XTech, Passion and its variants and Glamour led bulk of demand in the quarter. Urban demand remained strong throughout the quarter. The company plans to launch 5-6 premium bikes in the next couple of quarters.

On the EV side, Hero has forged several partnerships and collaborations on this front including charging infrastructure. The company has plans to expand its EV presence upto 100 cities and 150 dealers by end of FY24 and is well on track currently. Increased emphasis on premiumization by launching high end variants under the X-Tech brand, Harley Davidson and Karizma launches in the premium segment should enable the company to post a good volume growth in FY25E and increase its market share further. Hero is poised to launch three important launches of X 440, Karizma 440 and Maverick 440 along with HD 440 in the next few months to fill in the white spaces within their portfolio, especially in the premium segment and to combat with rival launches like the ones from RE, Bajaj Triumph and KTM. In the scooters segment, the company gained market share in the 110 cc segment through Xoom scooter, while launching Destini Prime in the 125 cc in H2 FY24. The company has plans to launch more models in the 125 cc scooters segment in the first half of FY25. Demand which had softened in the seasonally weak December post festives picked up well in January and is going well in February. Thus Hero is the only 2W company with such a solid pipeline of launches in FY 25, thus filling all the white spaces in their portfolio and is set to report strong volumes thereby.

Margins may show growth as EV expenses may get offset by operating leverage tailwinds and cost savings

Hero’s EBITDA margins in Q3 came 250 bps higher at 14% yoy as main input costs like those of steel and aluminium were benign. There were other cost savings under LEAP-2 program as well along with strong cost control overall. The company took reasonable price hikes in the quarter. Along with this, the favorable product mix and higher operating leverage has led the company to achieve its margin target of early of 14-16% in the medium to long term. Premiumization of bikes with the help of global partner Harley Davidson shall augur well further for a rich product mix. The launches of XTech variants which are priced higher by 5-7% than the conventional models should help the margins further to grow as operating leverage comes into play. We however believe that as volumes increase on the EV side operating leverage and cost saving programs should offset the >200 bps impact (seen in Q3) on margin performance going ahead.

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