The share price of Hero MotoCorp rose over four percent on Friday after global brokerages Jefferies and CLSA raised their target price on the stock and maintained a bullish stance.

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Hero MotoCorp said that demand momentum held up well in the last few months, and earlier concerns that the initial uptick was largely driven by pent-up demand have abated. Share of first-time buyers and those purchasing additional vehicles in a household has risen, while that of replacement is down. This, along with an increase in demand from office-goers, suggests a shift from mass transportation towards personal mobility.

Global brokerage Jefferies expects year on year sales numbers to hold up well over the next few months on an easing base, although the retail pick-up in the festive season would be crucial.

Jefferies noted that according to the OEM-wise registration data, Hero had gained around 4 percent retail market share in 2Ws in FY20, and has held on to the gains in YTD-FY21. Wholesale data suggests that the improvement is driven by market share gains in sub-125cc motorcycles along with a favorable demand profile shift from scooters to motorcycles.

“A better rural backdrop compared to urban would have helped Hero too, although this might play adversely once urban picks up. Any success in premium motorcycles should not only provide a boost to Hero's market share but also improve its long-term growth outlook,” the brokerage said.

Jefferies raised FY21-23E EPS by 2-9 percent mainly factoring in better gross profit per vehicle. It sees Hero's EPS falling 17 percent YoY in FY21 but then rising at a strong 21 percent CAGR in FY22-23 as 2W volumes recover on an exceptionally low base.

“After the ~30% stock rally in the last three months, valuation at 16x FY22E PE is not as cheap as earlier, but we believe is still reasonable to play the Indian 2W demand recovery,” it said.

Jefferies retained Buy rating on the stock and raised the target price to Rs 3,300 from Rs 2,725 per share earlier.

CLSA increased FY21-22 EPS by 1-3% and reiterated Buy call while raised its target price to Rs 3,315 from Rs 3,235 as it believes Hero’s 1QFY21 operating results were better than consensus expectations.

“Hero was able to maintain stable gross profit/vehicle in a quarter marred by BS6 transition and lockdown-induced demand contraction (volumes down 69% YoY). Fixed costs (ex-staff) were reduced by 52% YoY, resulting in Ebitda margin of 3.6%. Management expects rural demand momentum to continue and is gearing up to increase production ahead of festive season in Oct/Nov,” it said.

CLSA’s positive stance on Hero is premised on its strong motorcycle market share, focus on costs, and a return of pricing discipline in the 2W mass-market segment.

Last week, Hero MotoCorp reported a net profit of Rs 61.3 crore in the first quarter of fiscal 2021, a fall of 95.1 percent from Rs 1,257.3 crore in the year-ago period. Revenue from operations declined 63 percent to Rs 2,971.5 crore from Rs 8,030.3 crore, YoY.

Operating performance was better than expected as EBITDA during Q1FY21 was at Rs 108 crore as against CNBC-TV18's poll estimates of Rs 100 crore. However, EBITDA registered a decline of 90.7 percent YoY.

EBITDA margin contraction was also lower than expected. The operating margin during the quarter came in at 3.6 percent as against 14.4 percent, YoY. While the expectation was 2.4 percent.

The stock rose as much as 4.54 percent to intraday high of Rs 2,933.00 apiece on the BSE on Monday. The shares ended 4.35 percent higher at Rs 2,927.35.

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First Published:Aug 17, 2020 3:45 PM IST