Declining ICE Demand And Slow EV Ramp Will Dampen Prospects

Key Takeaways

• Slow adaptation to electric vehicles and over-reliance on entry-level motorcycles risk market share loss and continued margin compression.
  
• Urbanization, shared mobility, and regulatory pressures threaten long-term demand and profitability for conventional two-wheeler models.
  
• Strong growth across segments, aggressive moves in electrification, and cost optimization position Hero MotoCorp for long-term revenue stability and market leadership.

Catalysts

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

• Demand for internal combustion engine two-wheelers, which represent the core of Hero MotoCorp's revenue base, is expected to steadily decline as electrification accelerates globally and within India, eroding sales volumes and undermining long-term earnings sustainability.
  
• Rapid urbanization and the proliferation of shared mobility platforms are likely to drive a structural reduction in two-wheeler ownership in cities, shrinking Hero's addressable domestic market and constraining future revenue growth.
  
• Hero's slow transition to electric vehicles relative to more nimble domestic startups and aggressive global entrants leaves it vulnerable to fast market share erosion in the high-growth EV segment, putting at risk both topline expansion and future EBITDA margins.
  
• Continued over-reliance on the intensely competitive and low-margin entry-level motorcycle segment exposes Hero to ongoing price wars and compresses net margins, particularly as aspirational consumers shift towards premium and technologically superior offerings where Hero has limited brand presence.
  
• Increased regulatory pressure through stricter emissions norms and advancing carbon-neutral policies will continue to raise compliance costs for conventional ICE models, forcing further investment and squeezing profitability amid ongoing production and input cost volatility.

Hero MotoCorp Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Hero MotoCorp compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Hero MotoCorp's revenue will grow by 5.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 10.7% today to 10.9% in 3 years time.
• The bearish analysts expect earnings to reach ₹52.8 billion (and earnings per share of ₹245.91) by about July 2028, up from ₹43.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.6x on those 2028 earnings, up from 19.9x today. This future PE is lower than the current PE for the IN Auto industry at 30.5x.
• 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 19.63%, as per the Simply Wall St company report.

Hero MotoCorp Future Earnings Per Share Growth

Risks

• Hero MotoCorp is experiencing strong growth in both domestic and export markets, with global business dispatches growing by 43% year-on-year, which is twice the industry growth; this broad-based momentum is likely to support higher revenue and profitability in the long term.
  
• The company has maintained its leadership in the 100cc and 125cc segments, has gained market share in premium motorcycles and scooters through new launches, and is confident in further product rollouts; these actions may underpin sustained volume growth and mitigate revenue declines.
  
• Hero's rapid ramp-up in the electric vehicle (EV) segment, with EV volumes growing 200% and further new model launches upcoming, is supported by investments and strategic partnerships, indicating an ability to capture the secular trend toward electrification and diversify revenue streams for long-term stability.
  
• The company's investments in adjacent mobility categories, such as acquiring a 34.1% stake in Euler Motors for entry into the fast-growing electric three-wheeler segment, and its relationship with Ather Energy, expand its addressable market and could contribute to incremental earnings and margin resilience.
  
• Hero's ongoing cost optimization, manufacturing technology upgrades across old and new plants, and improved product mix within segments have already led to margin expansion, with guidance to maintain EBITDA margins between 14% and 16%, indicating the possibility of maintained or improved net margins over time.

Valuation

• The assumed bearish price target for Hero MotoCorp is ₹3330.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Hero MotoCorp's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• 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 ₹3330.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹482.1 billion, earnings will come to ₹52.8 billion, and it would be trading on a PE ratio of 21.6x, assuming you use a discount rate of 19.6%.
• Given the current share price of ₹4363.25, the bearish analyst price target of ₹3330.0 is 31.0% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.