On Thursday, Ambit Capital initiated coverage on Hero MotoCorp Ltd. (HMCL:IN) with a sell rating, setting a price target of INR 5,900. According to the firm, Hero MotoCorp, which has a significant presence in rural markets, could benefit from the sector's recovery. The company holds a dominant position with a 78% market share in the 100cc motorcycle segment, which accounts for over 80% of its volumes.
Despite the potential for growth through increased penetration of two-wheelers in rural areas, Ambit Capital points out that Hero MotoCorp is at risk of continued market-share erosion in domestic two-wheelers. Over the past decade, the company has seen an approximate 11 percentage point decline in this area. The firm attributes this risk to the market's shift away from Hero MotoCorp's core 100cc models and the company's lack of sustained success with new products in its weaker segments, which make up around 51% of the market.
Ambit Capital also highlighted the upcoming CNG motorcycle from Bajaj Auto as a potential threat to Hero MotoCorp's dominance in the 100cc motorcycle category. The new competition could challenge Hero MotoCorp's stronghold in this segment.
The firm's forecast for Hero MotoCorp includes an estimated 8% volume compound annual growth rate (CAGR) and a 12.2% earnings CAGR from the fiscal years 2024 to 2027. The sell rating is based on a discounted cash flow (DCF) valuation, which implies a price-to-earnings (PE) ratio of approximately 23.1 times the company's projected core earnings for the fiscal year 2026.
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