In this article we will try to analyze Hero Motocorp Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this fundamental analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Dated: 30 Jul 23
Company: Hero Motocorp Ltd.
CMP: 3172.00
Market Capitalisation: Rs. 63389.77 Cr.

Intrinsic Value of Hero Motocorp Ltd.

Hero Motocorp Ltd. is an iconic two wheeler manufacturer of India. The company had joint venture with Honda Motor Corp. till some time back. Since 2010 both the companies have decided to pursue their own paths. Since then Hero Motocorp has expanded its motorbike and scooter segments. The company has already moved into electric mobility also. It has its presence in Asia, Africa and South/ Central America and is planning to expand into North America and Europe.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Before we enter into the calculation of Intrinsic value of Hero Motocorp Ltd. we have to make some logical assumptions based on the previous six years financial statements and ongoing yield for 10y Government Of India bonds.

Assumptions:

Terminal growth rate is assumed to be 0%.
Discount rate is assumed to be 12%.
The increase in Free Cash Flow is assumed to be -Rs. 27.80 crores per year for the first five years and then -Rs 13.90 crores from sixth to tenth year. The growth rate is projected based on the past growth of Free Cash Flow (refer to figure below). In the past Free Cash Flow has increased at the rate of -Rs. 55.60 crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

Fundamental Analysis And Intrinsic Value of Hero Motocorp Ltd.

Increase in Revenue is assumed to be -Rs. 89.60 crores per year for the first five years and then -Rs 44.80 crores per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of -Rs. 179.19 crores per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

Free cash flow will be 8% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.08. We assume that this ratio will hold good for future.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free Cash Flow and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Free Cash Flow Growth Model

Intrinsic Value: Rs. 773.91

Stock Entry price with 25% margin of safety: Rs. 580.43

Revenue Growth Model

Intrinsic Value: Rs. 1031.50

Stock Entry price with 25% margin of safety: Rs. 773.63

The average of the above two stock entry prices works out to be Rs. 677.03. When the stock starts trading below this price it becomes attractive for long term investment.

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Fundamental Analysis Of Hero Motocorp Ltd.

Leverage Ratios

Observations:

The Company is operating with almost no debt.

Operating Ratios

Observations:

The company has maintained a stable fixed asset turnover ratio even during COVID period. This may have been made possible because of increased demand for two wheelers during this period.
The receivables turnover ratio has shown a downtrend during the period.

Profitability Ratios

Observations:

We can see a drop in PAT and EBITDA along with PAT and EBITDA Margins. This is worrisome as it indicates growing pressure from competitors. It is also noteworthy that the company has not been able to launch any iconic model either in bike or scooter segment during this period.
All other ratios ROE, ROCE and ROA have reduced to half during this period.