Foreign brokerage UBS sees a 45 per cent potential downside on Hero MotoCorp Ltd, citing a substantial retail market share loss despite recent launches. The foreign brokerage said Hero MotoCorp's wholesale volumes and festive optimism are clouding the two-wheeler maker's retail underperformance and that its stock is pricing in a potential recovery in demand.
"Despite reporting a Q1FY25 earnings miss and steady retail market share loss, Hero's stock has rallied 20 per cent since its Q1 earnings call. We believe the expected step-up in wholesale volumes in September-October, along with the management's positive festive commentary, drove the stock outperformance (1,300 bps outperformance over BSE Auto Index)," UBS said.
In April-August 2024, Hero MotoCorp's retail market share contracted 310 basis points to 28.8 per cent, with the September market share falling further below 24 per cent and 400 basis points behind Honda.
This sharp contraction, despite success of Xtreme 125, points to significant erosion in its commuter motorcycle volumes, UBS said. Competition from Honda Shine, Bajaj Freedom and an increased shift to scooters and EVs in smaller towns are further eroding Hero's core customer base, even as the market appears to be pricing in a recovery in commuter motorcycles, UBS said.
The foreign brokerage suggested a target price of Rs 3,350 against a closing of Rs 6,087.60. UBS said most investors it interacted with expect September wholesale volumes to be well in excess of 6,00,000 units and the same is indicated by dealers. It said wholesale volumes of that magnitude will diverge from Hero's retail trends, and point to significant inventory additions.
"As per Vahan, Hero's September retail volumes are expected to be around 3,00,000 units implying the company's inventory additions this month will exceed its full month retail volumes, pushing dealer (including sub-dealer) inventory to over 1.3m units. With high inventories and given the intense competition from Honda, we expect discounting from both companies to step up going into the festive season," UBS said.
UBS said despite the claims of record festive retail volumes, the company's retail market share during the festive season (Oct-Dec) has been dropping consistently reaching a new low going into the festive season this year.
"We also note Hero's festive retail volumes over the past few years (as seen from the company's regulatory filings) have been around the 14 lakh mark, despite claims of healthy double-digit volume growth over the previous festive season," it said.
With high inventories and given the intense competition from Honda, it expects discounting from both companies to step up going into the festive season.
"The stock is trading at 26 times FY26E PE, which is more than 3SD higher than its five-year historical average. We maintain our Sell rating with target price of Rs 3,350," it said.