Hero Motors' Rs 9 Billion IPO: A Comprehensive Analysis of Its Market Position and Growth Prospects

The Indian automobile industry has been riding a wave of growth, underpinned by favorable economic conditions, increasing personal incomes, and a steady supply of semiconductor chips. These factors, coupled with declining input costs, have contributed to a substantial increase in industry volumes. A key player in this thriving sector is the auto ancillary industry, valued at a staggering US$ 57 billion. This sector, crucial to both Original Equipment Manufacturers (OEMs) and the aftermarket, accounts for 2.3% of India’s GDP and supports over 7,000 companies.

Amidst this dynamic environment, Hero Motors, a prominent entity of the Hero Group, is set to make a significant move in the primary markets with its highly anticipated Initial Public Offering (IPO). The company is looking to raise Rs 9 billion through this IPO, which includes a fresh issue of equity shares worth Rs 5 billion and an Offer-For-Sale (OFS) of shares valued at Rs 4 billion by its promoters.

About Hero Motors

Hero Motors stands as one of India’s leading automotive technology companies, with a specialization in the design, development, and manufacturing of advanced powertrain solutions. Serving automotive OEMs across the United States, Europe, India, and the ASEAN region, Hero Motors has established itself as a key player in both the electric and non-electric powertrain markets. The company’s product range is vast, catering to a variety of vehicles, including two-wheelers, e-bikes, off-road vehicles, electric and hybrid cars, and heavy-duty vehicles.

The company operates through two primary segments: powertrain solutions and alloys and metallics. It boasts six manufacturing facilities located in India, the United Kingdom, and Thailand, making it a fully integrated provider of powertrain systems. Hero Motors offers comprehensive solutions, including the design, prototyping, validation, development, and delivery of powertrain systems, positioning itself as a leader in the global market.

Hero Motors’ clientele is impressive, including global giants such as BMW AG, Ducati Motor Holding S.P.A., Enviolo International Inc., Formula Motorsport Ltd., HUMMINGBIRD EV Inc., and HWA AG. The company is also a preferred supplier for leading electric bicycle manufacturers and other sectors like aerospace.

What Sets this IPO Apart?

Hero Motors’ association with the esteemed Hero Group provides it with a solid brand foundation and market presence. This association, coupled with its innovative approach, distinguishes Hero Motors from its peers. The company is one of the few globally that offers high-performance transmission systems for the premium Internal Combustion Engine (ICE) and performance ICE segments, striking a balance between high torque requirements and lightweight components.

Hero Motors was among the first in India to capitalize on the global e-bike powertrain market, giving it a distinct first-mover advantage in this rapidly growing industry. It is the only company in India manufacturing and exporting Continuously Variable Transmission (CVT) hubs to global e-bike OEMs, and the sole manufacturer of integrated electric powertrain products for e-bikes in the country. This unique positioning as a leading solutions provider to the global e-mobility industry, supported by a diversified product range, makes Hero Motors a standout player in the auto ancillary sector.

Financial Overview

Hero Motors’ financial journey over the past few years has been marked by both growth and challenges. The company’s revenue grew from Rs 9,141.9 million in FY22 to Rs 10,546.2 million in FY23, reflecting a robust growth rate of 15.4%. However, the growth momentum slowed considerably in FY24, with a marginal increase of 0.1%, bringing the revenue to Rs 10,643.9 million. This resulted in a compound annual growth rate (CAGR) of approximately 7.9% over this period.

On the profitability front, Hero Motors saw its net profit decline from Rs 990.2 million in FY22 to Rs 170.4 million in FY24, indicating a significant drop in profitability. The company’s net worth, however, has shown a strong upward trend, rising from Rs 1,591.1 million in FY22 to Rs 3,854.4 million in FY24. This increase in net worth, despite declining profits, suggests that Hero Motors has been able to strengthen its equity base.

Peer Comparison

When compared to its industry peers, Hero Motors demonstrates stable revenue generation but lags behind in profitability and return on equity. The company’s revenue of Rs 10,643.9 million is modest compared to larger competitors like UNO Minda, which generated Rs 140,308.9 million, and Endurance Technologies, with Rs 102,408 million.

Hero Motors’ Earnings Per Share (EPS) stands at a low Rs 0.4, which is significantly lower than peers such as Varroc Engineering (Rs 344) and Endurance Technologies (Rs 48.4). This indicates that Hero Motors’ ability to generate profits on a per-share basis is considerably weaker than its competitors. Additionally, the company’s Return on Net Worth (RoNW) is also low at 4.2%, compared to Varroc Engineering’s 34.9% and CIE Automotive India’s 18.8%. These figures highlight the challenges Hero Motors faces in converting revenue into profit and delivering strong returns to its shareholders.

Risk Factors

Investors should be aware of several risk factors associated with Hero Motors. A significant portion of the company’s revenue, nearly 29%, comes from the European market. Any adverse economic developments in this region could negatively impact the company’s overall revenue. Additionally, Hero Motors is heavily reliant on specific industries, such as e-bikes and two-wheelers, both in India and overseas. Any downturns in these industries could have a detrimental effect on the company’s business.

The company’s dependence on its top 10 customers for nearly 75% of its revenue is another risk factor. The loss of any major customer could significantly impact the company’s financial stability. Moreover, Hero Motors relies on a limited number of suppliers for critical raw materials, making it vulnerable to supply chain disruptions.

It is also noteworthy that several of Hero Motors’ subsidiaries have incurred losses over the past three financial years. These losses could potentially affect the company’s future financial performance.

In conclusion, Hero Motors is at a pivotal point in its journey, with plans to expand its exports and advance its technological capabilities. The company aims to leverage its strengths to manufacture components with reduced material waste and lower machining costs, which is particularly advantageous for the aerospace and automotive industries. Additionally, Hero Motors intends to undertake capital expenditure to enhance its manufacturing capacity, especially at its Gautam Buddha Nagar facility in Uttar Pradesh.

The Indian auto components industry is poised for significant growth, with projections suggesting it could reach US$ 200 billion by FY26. As India positions itself as a global hub for auto component sourcing, with exports expected to reach US$ 30 billion by FY26, Hero Motors is well-placed to benefit from these industry trends.

Moreover, the Indian auto industry’s plans to invest Rs 580 billion by FY28 to boost the localization of advanced components, such as electric motors and automatic transmissions, aligns with Hero Motors’ growth strategy. The Production Linked Incentive (PLI) schemes for automobiles and auto components, expected to attract a capital expenditure of Rs 748.5 billion over the next five years, further enhance the sector’s outlook.

As Hero Motors prepares for its IPO, the company’s strategic positioning in the global market, coupled with industry tailwinds, makes it a company worth watching. However, potential investors should conduct thorough research and consider the associated risks before making any investment decisions, ensuring that such investments align with their financial goals and risk tolerance.