Never miss a great news story!
Get instant notifications from Economic Times
AllowNot now


You can switch off notifications anytime using browser settings.
12,086.70114.9
Stock Analysis, IPO, Mutual Funds, Bonds & More

Hero MotoCorp: Making deeper inroads riding on rural roads

​With nearly half its sales coming from 7 states, there is lots of room left for growth.​

, ET Bureau|
Dec 01, 2018, 12.56 PM IST
0Comments
Others
Herorroo
With half its sales coming from 7 states, there is lots of room left for growth.
ET Intelligence Group: Hero MotoCorp, the world’s largest motorcycle maker by volumes, is expected to report sustained growth in the coming years, thanks to improving road connectivity in semi-urban and rural India.

Expansion in motorcycle sales in India has a higher correlation to road connectivity than to economic growth captured by gross domestic product. Therefore, when rural road connectivity improves, demand for two-wheelers increases too. This should also reflect in the performance of Hero MotoCorp, which derives nearly half its sales volume from the rural market.

Between 2011 and 2016, the length of rural roads in India rose 7.4% annually to 28 million kilometres. This accounted for 70% of the total road network, compared with 58.8% in 2011, according to the FY18 annual report of the Ministry of Road Transport and Highways.

The number of two-wheeler owners in states with the lowest per capita income rose to 75 for 1,000 people in FY18 from 45 five years prior. Sales volume grew 10.3% annually during the period compared with 3.2% in high per capita states. Hero MotoCorp derives nearly 48% of its sales from the seven states with low two-wheeler ownership. This makes it well placed to take advantage of rising ownership in these states.

Two-wheeler ownership in Southeast Asian countries, where scooters and motorcycles form a preferred mode of transport, is 150-300 per 1,000 people. Given the current level of per-capita ownership in India, there appears to be significant scope for improvement in sales volume. This augurs well for Hero MotoCorp.

Over the years, the company has focussed on cost rationalisation. As a result, its per unit operating profit before depreciation (EBITDA) increased to Rs6,468 in FY18 from Rs4,488 in FY12.

To take advantage of the latent demand, Hero MotoCorp is in the process of expanding capacity. By FY20, it will be able to manufacture 1.1 crore units a year, as its sixth plant in Andhra Pradesh will be commissioned by then. At the beginning of FY11, the company had an installed base of 54 lakh units, implying an 8.2% annual increase till FY20.

Capacity utilisation of plants has been 73-88% in the past eight years. The company’s capital expenditure was nearly Rs6,600 crore between FY12 and FY18, while it generated a free cash flow of nearly twice as much. This enabled Hero MotoCorp to retain a high dividend pay-out ratio of 51% in FY18.
Comments
Add Your Comments
Commenting feature is disabled in your country/region.
Download The Economic Times Business News App for the Latest News in Business, Sensex, Stock Market Updates & More.

Other useful Links


Copyright © 2019 Bennett, Coleman & Co. Ltd. All rights reserved. For reprint rights: Times Syndication Service