Focus On Premiumization And EV Expansion Will Drive Future Success

Key Takeaways

• Strategic focus on premiumization, EV leadership, and diverse revenue streams is likely to drive revenue growth and enhance profitability.
  
• Expansion in affordable EVs such as Vida V2 Lite aims to boost market penetration, contributing positively to earnings and economies of scale.
  
• Leadership changes and competitive EV pressures may challenge revenue and profitability, compounded by economic conditions, financial risks, and regulatory compliance costs.

Catalysts

Primarily engages in the manufacture and sale of motorized two wheelers in India, Asia, Central and Latin America, Africa, and the Middle East.

• The shift in Hero MotoCorp's strategic pillars to focus on premiumization, building EV leadership, and diversifying revenue streams indicates a forward-looking approach that is expected to drive revenue growth in the coming years.
  
• The ongoing reshaping of Hero MotoCorp's portfolio, reflected in multiple new product launches, is anticipated to capture market share, optimize the product mix, and positively impact operational margins and profitability.
  
• The expansion of the EV product lineup, particularly with more affordable options like the Vida V2 Lite, is expected to increase market penetration and contribute positively to revenue growth and economies of scale, thereby enhancing earnings.
  
• Hero MotoCorp's strong cash flow from operations and improved EBITDA margins are anticipated to provide the financial flexibility needed to aggressively invest in new growth initiatives, supporting long-term revenue and earnings growth.
  
• The leadership transition, along with the focus on executing the well-defined 2030 strategy, leveraging operational pillars like speed and synergy, is likely to result in improved efficiency and competitive positioning, potentially boosting net margins and earnings.

Hero MotoCorp Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hero MotoCorp's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 12.0% in 3 years time.
• Analysts expect earnings to reach ₹61.8 billion (and earnings per share of ₹309.33) by about May 2028, up from ₹41.5 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹47.9 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.2x on those 2028 earnings, up from 18.5x today. This future PE is lower than the current PE for the IN Auto industry at 28.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.33%, as per the Simply Wall St company report.

Hero MotoCorp Future Earnings Per Share Growth

Risks

• Transition in leadership and management positions may affect strategic consistency and execution, which could impact revenue growth and operational efficiency.
  
• Competitive pressures in the EV market, with the need for continuous investment and lack of current PLI benefits, may affect profitability and market share in the electric vehicle segment, impacting overall earnings.
  
• Economic conditions affecting rural demand, particularly the affordability in the 100cc segment, may challenge market share growth, directly impacting revenue.
  
• Potential financial risks associated with Hero FinCorp, including higher credit costs and delinquency rates, could affect overall profitability and net margins.
  
• The regulatory compliance and cost increases due to OBD-II Phase B norms may lead to pricing pressures, impacting earnings from the existing ICE vehicle portfolio.

Valuation

• The analysts have a consensus price target of ₹4653.088 for Hero MotoCorp based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹6200.0, and the most bearish reporting a price target of just ₹3200.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹514.0 billion, earnings will come to ₹61.8 billion, and it would be trading on a PE ratio of 26.2x, assuming you use a discount rate of 20.3%.
• Given the current share price of ₹3830.6, the analyst price target of ₹4653.09 is 17.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.