Broking firm Sharekhan has suggested buying the stock of 2-wheeler major HeroMoto Corp for an upside on the stock of as much as 41%. HeroMoto Corp is one of the world's largest 2-wheeler manufacturers.
Under Performance vis a vis the Nifty
Hero MotoCorp Limited has underperformed the broader market NIFTY by 37% in the past one year, driven by subdued performance of entry and executive level bikes in domestic markets, where Hero is the undisputed leader.
"The BS-6 transition, input cost inflation, and slower economic growth impacted buyers of entry level bikes. With the timely arrival of the monsoon season this year, we expect the rural economy to revive strongly, resulting in recovery of entry and executive level bikes. Hero is likely to be the key beneficiary due to its strong and deep-rooted distribution network in rural semi-urban areas in the country," the brokerage has said.
Recovery in rural economy to help the company
According to Sharekhan, Hero has the strongest distribution network in the country's rural and semi-urban areas.
"Timely onset of the monsoon season will revive rural demand in the near future, further supported by the previous three years of normal monsoon and positive rural sentiments," the brokerage has added.
New launches to propel growth
According to Sharekhan, aggressive launches in scooters and premium bike segments will benefit the company. "Hero has strengthened its product portfolio in the scooters and premium bike segment through a slew of new launches in the past two years. Management remains committed to launch at least one product every year over the next four years. We expect new launches to help the company build and position its brand in the long run," the brokerage has said.
Valuation and price target for HeroMoto Corp
Sharekhan expects Hero to be the greatest beneficiary in the sector, given its leadership and largest distribution network.
"Moreover, the company's aggressive plans in scooters, premium bikes, and electric vehicle segments are likely to augur well for medium-term growth. Post the 18.5% correction in the stock price over the past six months, the stock is trading at comfortable valuations at a P/E multiple of 12x and EV/ EBITDA multiple of 5.9x its FY2024E estimates, with attractive dividend yield of 4.8%. We maintain our Buy rating with a revised price target of Rs. 3,210," the brokerage has said.
Slump from 52-week highs
The stock price of HeroMoto Corp has slumped from 52-week highs of more than Rs 3100 to the current market price of Rs 2261. In fact, it has clearly under performed the benchmark indices in the last few quarters. The stock of HeroMoto Corp is also trading very close to 52-week low of Rs 2242 on the National Stock Exchange.
Key risks for the stock of HeroMoto Corp
According to Sharekhan, the success of rival products in the entry and executive bike segments can impact Hero's market share in the segments.
"The company is aggressively expanding its product portfolio in the premium bikes segment. Unsuccessful launches in the premium segment can restrain its growth path," Sharekhan has added.