The 2024 Lok Sabha elections not only surprised pollsters but also shifted India's political landscape, sending Indian equity indices to their worst crash in four years.
In such a weak market, brokerages have turned defensive, with most attributing increased allocation to rural themes amid expectation of a favourable monsoon and hope of welfare reforms that would revive the agrarian economy. Hero MotoCorp could be one such suitable proxy for consumption in the rural market.
Model Portfolio Additions
Since the election results, multiple brokerages have issued updates and changes to their model portfolios. They have also made changes to their sectoral allocation, with the majority of them increasing positions in FMCG companies while reducing positions in capex, defence and PSUs.
Citi sees Hero MotoCorp as a proxy play in consumption. They expect a greater focus on rural demand, including more incentives for the agri segment. This could take the form of new schemes to boost rural income, subsidies and a higher minimum support price.
Emkay prefers Hero MotoCorp over TVS Motor Co., based on valuation and rural play for Hero, while Phillip Capital and Prabhudas Lilladher have also added the company to their model portfolio.
Peers Outperformance
The two-wheeler makers have had a dream run over the past couple of years, with TVS and Bajaj Auto showing strong growth in sales with launches in the premium and electric vehicle spaces.
Bajaj's share prices have surged by up to 150%, while TVS has experienced a 200% increase in the past two years. While Hero MotoCorp has also doubled over the past couple of years, much of the gains have come in just the past year, up 93% since June 2023.
Hero MotoCorp's stock has been gaining over the past three–four quarters on the back of new launches both in the premium and its stronghold entry-level markets. Within premium, they've launched the Harley-Davidson 440X, as well as the new Karizma XMR and Maverick 440.
New 125cc Segment Getting 'Extreme’
The new Hero Xtreme 125 has been the company's most anticipated launch, challenging competitors TVS Raider and Bajaj Pulsar 125 in this segment. There has been a change in consumer preference, especially among the younger and more urban-centric customers, to move away from the base 100-cc bike variants to a higher-cc range, and the 125-cc makes the cut with price- and value-conscious customers.
Hero MotoCorp has a strong rural presence and is also betting on the revival of growth in the 100–110cc segment by launching an update on the Splendor Plus, according to Emkay. The company currently sells 78% of all new bikes in the sub-110cc segment, almost three times the industry mix of 26%, the brokerage said. They are also lower by 500 bps in the 110–125 cc segment compared to the industry. The new launches are expected to address the gaps in both of these segments, it said.
The 125-cc category has quickly become the fastest-growing segment in motorcycles, accounting for 27% of all motorcycles sold domestically.
Hero MotoCorp has been slightly slower on launches in 110–125cc segments, as they enjoyed a market share of upwards of 40% by the end of March 2021. However, the market share fell to 17% by the end of March 2024, as competition, primarily from TVS Raider and Bajaj Pulsar, ate into their share.
Historically, Bajaj Auto has had limited presence in the entry-level segment, and their market share has been around the 8–9% range with the CT 100 and Platina, according to sales volume on VAHAN. While it did offer products in the 110cc and above segments, it lacked a prominent brand to appeal to consumers. Back in 2018, Rajiv Bajaj, managing director of Bajaj Auto, called Discover 100-cc his career "biggest blunder." The company has always focused on the premium segment.
Targeted launches by companies, including Bajaj and TVS, have fulfilled the strong consumer preference shift in the 125cc segment, where more youngsters are choosing a sportier and value-conscious bike, sales data from VAHAN suggests. This is similar to the movement seen when Pulsar was first launched in the early 2000s in the 160-cc space and has surely come full circle. After that, the company has sold 1.8 crore rupees across categories, as it said recently at the Pulsar 400 launch.
TVS also sensed the opportunity and launched the Raider in October 2022. It is one of the company's best-selling motorcycles. In April, the company sold 50,000 Raider units, according to Auto Punditz.
Hero is expected to capitalise on this space's prominence and strong rural reach.
Growth Avenues
The company has been proactive with launches in the previous fiscal, with the new Vida EV scooter launch. From just under 1,000 units sold, EV sales for Vida grew to roughly 17,000 units in fiscal 2024, according to VAHAN.
Overall, they have a very small presence in the low single digits of scooter sales. This year, the company is launching the Xoom 125 and the Xoom 160 to further address the gaps.
Valuations Supportive
The sharp run-up in stock prices of other two-wheeler makers has led to Hero MotoCorp becoming the preferred choice for investors, according to leading brokerages. Apart from valuations, its strong rural presence has also been instrumental in making expectations of rural recovery stronger this year.
Most brokerages have also turned upbeat. Emkay has reiterated its 'buy' call with a target price of Rs. 6,000, implying an upside of 13%. They see Hero MotoCorp as a defensive bet with strong growth and re-rating potential. While the two-wheeler recovery continues to broaden, the rural segment is also making a return, which is a stronghold for Hero. Emkay continues to expect a two- to three-year growth in visibility, led by the return of first-time buyers this year. The stock now trades at 20 times its price-to-earnings estimates for fiscal 2026, versus 26–30 times for the other two-wheeler.
Nomura is also optimistic, setting a target price of Rs 5,448 apiece following the results of the fourth quarter. Their recent industry survey has provided positive feedback on "Xtreme 125 R," which gives visibility on growth. Further improvement in the sales of Xtreme 125 and Ebitda margins should drive re-ratings, said the brokerage.
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