Hero MotoCorp's EV Push Drags Margins Despite Double-Digit Revenue

A lot of things worked well for Hero MotoCorp in its recent Q2 results. Double-digit revenue growth, a modest uptick in profit margins and an uptrend in rural demand all together painted a promising picture for the automobile firm's future course.

The price play was also on point as the average revenue per vehicle (excluding spare parts) rose by 3.8 per cent to Rs 59,270. This was largely driven by customers opting for higher-priced models or let's just say the premiumisation trend. Most importantly, in the rural segment, first-time buyers started returning to the market, signalling to a positive sales growth path.

Profit after tax surged to Rs 1,203 crore, up by nearly 14 per cent (year-on-year basis). Whereas, revenue from operations surged by almost 11 per cent and stood at Rs 10,463 crore during Q2FY25. Despite an overall optimistic image, especially at a time when the larger demand picture remains subdued, there are 2 things that are acting as a downer.

First, the declining market share of the company, particularly in the retail space. And second, losses in the EV segment which continued to weigh heavily on the overall margins.

What's going wrong in Hero's EV play?

While Ebitda margins witnessed a slight year-on-year uptick of 0.4 per cent to reach at 14.5 per cent, the profit margins were partially held back as the EV business is yet to see profit figures. In fact, the higher costs and lower margins in the EV business were a drag on the company’s overall profitability.

"HMCL’s 2QFY25 results were steady and in-line with the street as Ebitda margins expanded by 40 basis points YoY at 14.5 per cent. This was constrained by EV (margin drag of 200 basis points) as underlying ICE (internal combustion engine) margins were healthy at 16.5 per cent, supported by operating leverage, favorable mix, cost savings and price hikes," Yes Securities stated in its report.

The company is the largest shareholder in Ather which might be witnessing a steady increase in market share but is yet to incur profits.

However, the management remains optimistic as it plans on ramping up its EV volume through new product launches. Even in the premium segment, Hero MotoCorp plans to launch a series of new models like the Xpulse 210, Xtreme 250R and Vida Z to strengthen its position as it experiences a decline in market share.

But despite launching several products, the automobile company has struggled to keep pace with its peers in terms of market share gains. And this is primarily owing to the increasing competition from Honda (Honda Motorcycle and Scooter India) and TVS Motors.

"Retail market share stood at 27.9 per cent, down 260 basis points YoY, in FY25 YTD (year to date), primarily due to increased competition from HMSI as the latter’s production normalizes and outperformance by TVS Motors," Elara Capital said in its report.

Back to normal inventory levels

Just a few months back, high inventory levels were a major issue for the automobile industry. This had even pushed the automobile index in a sharp downtrend. In the last 3 months, the Nifty Auto index plummeted by nearly 8 per cent.

But the revival in rural demand coupled with the festive season, was able to improve the overall outlook slightly. During the festive season, Hero Motocorp sold 1.6 million units, marking a 13 per cent YoY growth.

This growth was primarily driven by positive response to new product launches during the festival period. Successful marketing campaigns and robust demand from urban and rural areas brought down inventory to normalised levels of four weeks (which previously stood at 6-7 weeks), as per a report by Elara Capital.

What do the brokerages say?

On year-to-date basis, Hero Motocorp shares have delivered a double-digit return of over 15 per cent on the National Stock Exchange. However, the share price remains down by nearly 24 per cent from its all-time high of Rs 4,761.

Yes Securities has maintained an ADD rating with a revised target price of Rs 5,377 (down from Rs 5,789). As per the brokerage house, the management’s efforts to revamp its brand strategy coupled with Ather’s growing brand acceptance, offer additional support for the stock.

"We expect a revenue CAGR of 10 per cent during FY24-27E, with an Ebitda margin of 15.5 per cent in FY27E. We reiterate Accumulate with a target price of Rs 5,510 on 19x December 2026E PE and Rs 159 ascribed to the Ather stake," Elara Capital stated in its report.