Hero facing headwinds may not speed up enough to suit investors

ET Intelligence Group: Hero MotoCorp appears no longer an investment script sticking to the tagline in its 20th century joint-venture avatar: Fill it, Shut it, Forget it.The biggest beneficiary of India’s switch in consumer preference from scooters to bikes over the past two decades is now at a crossroads, and analysts are unsure whether the drive would be as racy as it has so far been after the BS-VI traffic junction switches on the green light.Hero’s single-digit earnings growth in FY19, therefore, is likely to keep the upside capped for the stock, even though it is trading at 14.7 times twelve-month earnings, a discount of 7 per cent to its long-term average. Hero MotoCorp trailed the Nifty by 8 per cent in FY19, and the tide is unlikely to turn soon unless volumes and margins head north.Hero MotoCorp’s earnings growth in FY19 dropped 7.5 per cent, the first in five years. Muted volume growth and margin worries promise hardly any better in FY20, as India deploys new emission standards.Hero sold 78.21 lakh units last fiscal, and had volume growth of 3.1 per cent due to contraction in the scooter segment. The Street is pricing in volume growth 4-5 per cent in FY20, but the pressure on margins would likely remain. It has guided for 5-7 per cent volume growth for FY20 as it expects higher scooter sales.The company expects improvement in scooter volumes after the launch of another higher-displacement model in the next few months. Scooters made up a tenth of total volumes in FY19 and volumes dropped 18 per cent in the same period.On motorcycles, growth prospects are linked to revival in rural demand. The company, in a post-March earnings conference call, said that rural sales remain challenging and the first half of the current fiscal is likely to be muted, and some pickup in rural demand is expected in the Kharif season. On the overall market, the channel inventory continues to remain elevated.Hero’s inventory is still about 10 days higher than average and the company plans to bring it down to the average level, affecting shipment growth in the first quarter. Also, liquidity in the system continues to remain tight and aggressive finance offers by NBFCs are not available. So, volume growth of 4-5 per cent in the domestic motorcycle business would be a tall ask.Hero’s operating margins fell to 13.6 per cent in the March quarter, the lowest in four years. Lower capacity utilization and increased competitive intensity could weigh on the margins. So, the company believes margins would remain at where they are at least until the first half of FY20. The Street is pricing in operating margins of 14.5 per cent and 14 per cent for the current and next fiscal years.The next big trigger for the stock will be its decision on the volumemargin trade-off in the festive season before implementation of new emission norms next April. 69089905

from Economic Times http://bit.ly/2DAahgY