Accumulate Hero Motocorp - Dolat Capital

- We continue our preference for Hero Motorcorp in the two wheeler space even as the stock has had under performance over the last three months (+2% vs 12%). We believe the valuations at 14.0xFY14E are attractive at an absolute and relative level (Bajaj Auto trades at 17.8xFY14E). We recommend BUY.

- The Indian market predominantly favors 100cc motorcycles; almost 70% of total sales belong to this category. Splendor and Passion continue to drive Hero's sales, contributing ~45% to volumes.

- Hero's total distribution network in the country (including dealers, sales and service network) numbered over 6,000, covering over 100,000 villages. This we believe shall be an advantage for the next two to three years to Hero before competition catches up in these markets.

- We believe that the performance of Hero in the scooter segment is an evidence of the management capability on branding and distribution. From being a marginal player in the segment, Hero Motocorp has emerged to become the second largest player in the segment, with a 17% market share. Scooter sales were also up 23% YoY in FY13 till October). The current run rate of scooter sales stands at 45000 units per month.

- We also believe that Hero has strong potential to explore export markets. It currently exports 165,000 motorcycles annually, compared to Bajaj Auto's 1.2 mn units. Bajaj Auto's offering in global markets is a value proposition (USD500-600 price range). Notably, the company was unable to export earlier because of non-compete clause with Honda. Post split, we believe exports shall be one of the key drivers of growth for the company.

Source : Equity Bulls

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