MOSL: HERO MOTOCORP (Neutral)-Compete on product/brand and not react on pricing

Hero MotoCorp: Compete on product/brand and not react on pricing; Focus on consolidating lead in commuter segment, filling gaps elsewhere

(HMCL IN, Mkt Cap USD9.4b, CMP INR3246, TP INR3446, 6% Upside, Neutral)

We met Mr Niranjan Gupta (CFO) and Mr Sanjay Bhan (Head – Sales) of Hero MotoCorp (HMCL) to get an update on (a) competitive intensity in the Commuter segment, (b) product positioning for upcoming launches in the Scooter 125cc and Premium motorcycle segments and (c) risk to profitability from competition. While management sees a limited impact from the aggressive pricing strategy of a competitor, it is excited about the upcoming launches in the white spaces (Scooters 125cc and Premium motorcycle) of its product portfolio. Key highlights:

 Not to react to aggressive pricing, rather focus on product/brand

• HMCL does not plan to react to BJAUT's aggressive pricing for CT100 in the Economy segment. The company believes that differential pricing has always existed in 2Ws, and in none of the categories, cheaper products are market leaders.
• Its strategic focus would instead be on brand/product, which would include segment-specific marketing activities and product actions.
• Like BJUAT, HMCL believes that aggressive pricing could be driving expansion of the market as it makes products affordable. This is also reflected in HMCL's Economy segment volumes, which grew ~23% YoY (+4% QoQ) in 1QFY19, but the company still lost market share by ~170bp YoY (-770bp QoQ).
• It also believes that such aggressive price cuts will impact the brand, as resale value for existing customers will also decline substantially. Given very high relevance of total cost of ownership, such aggressive price cuts might be detrimental over the medium/long term.
• Lastly, it does not see customers downtrading from Splendor/Passion to CT100 as purchase decisions in these segments are also aspirational in nature.