Hero Motors IPO

Global E-Mobility Leadership & Unique Positioning: Hero Motors is recognized as one of India’s leading solutions providers to the global e-mobility industry. It holds a distinct first-mover advantage in the global e-bike powertrain opportunity, being the only player manufacturing and exporting CVT hubs to global e-bike OEMs from India and the only manufacturer of integrated electric powertrain products for e-bikes in India.

Research and Development (R&D) Expense: The company's R&D expense was ₹79.31 crore in FY24, representing 7.45% of its revenue. In comparison, peers like Sona BLW spent ₹79.3 crore (2.84% of revenue) and Endurance Technologies spent ₹69.78 crore (0.68% of revenue) in FY24. This indicates that the company's R&D expenditure as a percentage of revenue is significantly higher than its listed peers.

Higher Revenue from International Customers than most Peers: The company generated ₹439.4 crore from international customers in FY24, representing 41.28% of its total revenue from operations. This percentage is higher than most of its listed peers, such as UNO Minda (14.02%) and Endurance Technologies (25.96%), and comparable to CIE Automotive (43.00%), though lower than Sona BLW (57.70%) in Fiscal 2024.

Diversified Product Portfolio & OEM Partnerships: The company offers comprehensive powertrain solutions for both electric and non-electric vehicles, including gears, transmission systems, and alloy & metallic components. It collaborates with premium global OEMs such as BMW, Ducati, Enviolo, and Hero MotoCorp, providing design-to-cost solutions and integrated systems rather than just 'make-to-print' services.

Experienced Management Team and Corporate Governance: The company is led by an experienced board, including Pankaj Munjal with over 36 years of experience, and a professional management team. A majority of its senior management has been associated with the company for over five years, fostering efficient business operations and growth strategies. It also benefits from equity investment and guidance from ESG-focused private equity funds.

Declining Asset Turnover Over the Years: Hero Motors is investing more in factories, equipment, and other assets, but the sales it earns from these investments are not growing at the same pace yet. Its asset turnover fell from 1.3 in FY22 to 1 in FY24, and further to 0.69 in 9M FY25, showing weaker use of assets to generate revenue.

Inventory Days Much Higher than Peers: Hero Motors is taking longer to sell its inventory compared to its peers. It held stock for 62 days in FY24 and 71 days in 9M FY25, much higher than Endurance (31), UNO Minda (43), and CIE India (46). This means more money is tied up in unsold goods.

Falling Profits Despite Revenue Growth: While Hero Motors grew its revenue at 8.45% annually between FY22 and FY24, its net profit dropped steeply from ₹99 crore to just ₹17 crore. This sharp decline raises concerns about rising costs, margin pressure, or operational inefficiencies.

High Customer Concentration: The business is heavily dependent on a limited number of customers, with its top 10 customers accounting for 74.46% of revenue in the Apr-Dec 2024 period (9M FY25). This concentration has been consistently high, ranging from 76.96% to 88.84% in the preceding three fiscals. Key customers include Hero MotoCorp Limited, BMW AG, Enviolo, HWA AG, Makino Auto Industries Private Limited, and Ducati, among others. The loss or significant reduction in sales from any of these customers could materially impact its financial condition.

Geographic Revenue Concentration: A notable portion of its international revenue is concentrated in Europe, which contributed 26.27% of its total revenue in 9M FY24. This sustained reliance on the European market, which has also been 29.33% (FY24), 32.47% (FY23), and 29.34% (FY22), exposes the company to adverse economic or political events in that region.

Supplier Dependence and Lack of Definitive Agreements: The company relies on a limited set of suppliers for critical raw materials. Importantly, it does not have definitive supply agreements with all its suppliers. Although its top 10 suppliers account for less than 40% of raw material costs, interruptions in supply or inability to procure materials at desired prices and timelines due to this dependence could negatively affect profit margins and financial performance. Additionally, 4.63% of its supplies are sourced from outside India (9M FY24), which introduces further supply chain risks.

Challenges in Adapting to Rapid Technological & Market Changes: The automotive sector, especially the e-mobility segment, is undergoing rapid technological and market changes. The company faces a risk of not being able to anticipate and swiftly respond to these evolving trends or develop new products aligned with customer demands. While there have been no product failures in recent periods, failure to effectively innovate and keep pace could adversely affect its financial condition.