Hero MotoCorp stock may outpace Maruti as DeMo effects wane

Rural markets, which constitute more than one-third of total motorcycle sales, had seen a sharp demand compression after demand disruption. NSEBSEMaruti SuzukiLoading data…

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      ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIES ET Intelligence Group: Superior volume growth and relatively cheaper valuation could drive increased investor interest in the shares of two-wheeler companies over those of four-wheeler makers in the near term.

      This could mean the nation’s largest motorcycle maker, Hero MotoCorp, could outperform Maruti Suzuki, the No.1 carmaker, on the bourses over the next few months. Year-todate, Maruti Suzuki shares have outpaced Hero MotoCorp 49% to 29%.

      There are a few factors that are working for two-wheeler stocks.Firstly, two-wheeler volume growth had taken a bigger hit than four-wheelers in the past few months because of demonetisation and destocking by dealers ahead of the transition to GST.

      Rural markets, which constitute more than one-third of total motorcycle sales, had seen a sharp demand compression after demand disruption. As a result, Hero MotoCorp’s volume shrank 12.9% in the five months since demonetisation -November 2016 to March 2017. In comparison, for Maruti Suzuki, the pace of volume growth largely remained unaffected at 11.2% in the same period. With demand for motorcycles returning to normal levels, backed with the pent up latent demand of the last few months due to external shocks, the segment now offers more volume upside than passenger cars.

      The upcoming festival season may further boost two-wheeler demand. Typically , two-wheeler volumes have a higher dependence on festivals. A senior executive at a leading two-wheeler maker said festival sales would likely be 20% higher this season than last year.

      Maruti Suzuki’s volume growth has been 18% since the beginning of the year and it has capacity constraints with existing plants run ning at full capacity . Hence, there is little room for volume upside for the company . Hero MotoCorp’s volume expansion since the beginning of the year is 9.2% and the Street is pricing in 9-10% growth through the current fiscal year.Thus, it will have ample space for volume upside.

      The Hero MotoCorp stock is trading at 33% cheaper than Maruti Suzuki based on fiscal 2018 earnings. This could further add comfort to investors.

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