Hero MotoCorp Limited (NSEI:HEROMOTOCO), a IN₨695.77B large-cap, is an automobile company operating in an industry whose long product cycles and deep capital investments make planning ahead a difficult endeavour. Upcoming challenges facing the sector is navigating the path from current automobile models to driverless cars, requiring high capital outlays in emerging technology. Shortcomings of well-established auto companies provides an opportunity for technology firms such as Alphabet and Apple to create their own software underlying autonomous and communication capabilities of automobiles. Automobile analysts are forecasting for the entire industry, a strong double-digit growth of 19.68% in the upcoming year , and a whopping growth of 71.97% over the next couple of years. This rate is larger than the growth rate of the Indian stock market as a whole. Should your portfolio be overweight in the automobile sector at the moment? Below, I will examine the sector growth prospects, as well as evaluate whether Hero MotoCorp is lagging or leading its competitors in the industry. See our latest analysis for Hero MotoCorp
What’s the catalyst for Hero MotoCorp’s sector growth?
The increasing presence of tech firms in the auto industry cannot be overlooked or discounted by OEMs. In the next decade, software integration will likely have a significant impact on the auto industry, given the alignment of their expertise – they are adept to connecting value-add components to created networks for information, efficiencies and experiences. In the past year, the industry delivered growth of 1.84%, though still underperforming the wider Indian stock market. Hero MotoCorp leads the pack with its impressive earnings growth of 14.07% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be 2.88% compared to the wider automobile sector growth hovering in the teens next year. As a future industry laggard in growth, Hero MotoCorp may be a cheaper stock relative to its peers.
Is Hero MotoCorp and the sector relatively cheap?
Automobile companies are typically trading at a PE of 21.53x, in-line with the Indian stock market PE of 24.94x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. However, the industry returned a higher 20.59% compared to the market’s 9.65%, potentially illustrative of a turnaround. On the stock-level, Hero MotoCorp is trading at a PE ratio of 19.41x, which is relatively in-line with the average automobile stock. In terms of returns, Hero MotoCorp generated 34.16% in the past year, which is 13.57% over the automobile sector.
Next Steps:If Hero MotoCorp has been on your watchlist for a while, now may not be the best time to enter into the stock. The company is an automobile industry laggard in terms of its future growth outlook, and is trading relatively in-line with its peers. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the automobile sector. However, before you make a decision on the stock, I suggest you look at Hero MotoCorp’s fundamentals in order to build a holistic investment thesis.
- 1. Financial Health: Does it have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- 2. Historical Track Record: What has HEROMOTOCO’s performance been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- 3. Other High-Growth Alternatives : Are there other high-growth stocks you could be holding instead of Hero MotoCorp? Explore our interactive list of stocks with large growth potential to get an idea of what else is out there you may be missing!