Hero Motors: Strategic Expansion Story — But Is the Valuation Justifie... Hero Motors: Strategic Expansion Story — But Is the Valuation Justified? Read more

Whenever the majority of investors mention the name Hero, people would instantly associate with motorcycles and Hero MotoCorp.

But off the record, another Hero group company is constructing something quite different i.e. a global auto-parts portal with EV aspirations, enormous capex and a valuation that already includes a glimmery future.

The name of that company is Hero Motors Limited.

Hero Motors is at a very crucial crossroad today.

Its returns are low, its profits are low, and leverage is high but its asset base has been tripled, EV alliances exist, it has strong exports, and a post capex rebound earnings would actually change the story.

Is Hero Motors a high-conviction turnaround opportunity -or a valuation trap?

Let’s break it down.

Company Overview What Is Hero Motors?

Hero Motors is a B2B manufacturer of auto-components whose focus is:

• Digital components of powertrain and drive.

• Accurate manufacturing components.

• High quality two-wheeler parts.

• EV drivetrain solutions

It delivers to the major two-wheelers, three-wheelers, passenger car, and EV OEMs in India and abroad.

What is unique to Hero Motors and an ordinary auto ancillary is its strategic change:

• Out of commodity auto parts.

• To high value, technology-based products, in the form of drives and EVs.

Some of the important Strategic Assets and Subsidiaries.

Hero Motors manages a few businesses that are considered strategic:

1) HYM Drive Systems (90% owned)

Manufactures EV hub motors. A 10 percent share, which is a big strategic affirmation, belongs to Yamaha Motor Co.

2) Hewland Engineering (UK)

Motorsport and high-performance EV transmission specialist. Provides Hero Motors with niche international publicity.

3) Spur Technologies (acquired FY24)

Niche suspension systems, wheels, and handle bars to high-end markets.

This combination is a rare combination which Hero Motors has in this portfolio:

• Local size of manufacturing.

• Global niche exposure

• EV optionality

• High end product placement.

Business Model: The Hero Motors Money Making Process.

Hero Motors has a multi-stream auto ancillary model that generates revenue:

1) OEM Component Supply

Its core revenue driver. Distributes powertrain, drives and accuracy components to local and international OEMs.

Margins volume elastic and scale advantageous.

2) Premium & Niche Products

Greater margins through Spur Technologies and Hewland engineering.

They are less commoditized and more technology-focused segments.

3) EV Drivetrain Solutions

UB motors and EV drives via HYM Drive Systems.

This remains a minor contributor in the current day but has a long term margin and valuation optionality.

4) Exports (~40% of Revenue)

Export business will diversify the revenues not based on the Indian auto cycle, as well as, enhance pricing power.

This also puts Hero motors in the position of global motorsport and niche EV.

Financial Reality: Growth Without Profits

At first glance, Hero Motors’ financials look underwhelming.

Revenue Growth (FY22–FY25)

• ₹914 Cr → ₹1,111 Cr

• 3-year CAGR: ~6.5% (far below sector leaders)

Profitability & Returns

• EBITDA margin: ~9.9%

• Net profit margin: ~3.0%

• ROCE: 3.8%

• ROE: 7.7%

Balance Sheet

• Debt/Equity: ~1.0x

• Interest Coverage: 2.18x

What Makes Returns weak: The Heavy Capex Cycle.

Hero Motors is currently in the midst of ruthless capacity and technology growth.

Capital Investment

• Fixed assets (PPE):

₹164 Cr (FY22) → ₹495 Cr (FY25) — nearly 3x in 3 years

Capex Deployment Includes

• New EV manufacturing lines
• New machining and drive train capacity.
• Spur Technologies acquisition.
• Technology upgrades and R&D

R&D Spend

• Jumped to 7.45% of revenue (FY24)
• Way above the majority of old-fashioned auto ancillaries.

Short-Term Impact

• Higher depreciation
• Higher interest costs
• Higher employee expenses
• Depressed margins and ROCE

Better still, the utilisation remains very low:

• HYM Drive Systems: utilisation of approximately 9 %.
• Spur Technologies: Utilisation of about 40%.

That is why the current returns are unattractive, as well as why the operating leverage may be effective in the event of volume growth.

The EV Angle: The Real Optionality, and Not Buzzwords.

The EV story of Hero Motors is not merely a marketing gimmick.

HYM Drive Systems

• EVs are manufactured with the production of hub motors.
• Yamaha Motor Co. holds a 10% stake
• Caterers to Indian and international e-mobility markets.

Why this matters:

• The technology roadmap is justified by the investment made by Yamaha.
• Enhances the appeal to international OEMs.
• Opens export opportunities
• Premium margins will be created in the long run.

Additional EV-Linked Assets

• Hewland (UK) performance EV performance.
• Rising R&D intensity
• Target light alloys and precision engineering.

Hero motors is evidently trying to make a structural change:

of manufacturing parts of commodities to technology-based mobility parts.

Exports: A Structure Positive Lapse of Most Investors.

Export amounts to around 40 % of the revenue of Hero Motors.

It is an important advantage:

• Lessons reliance on the Indian automobile cycle.
• Adds FX tailwind potential
• Enhances value performance compared to domestic-only counterparts.
• Places the company in the niche segments of the world market.
• Endorses motor sport and EV high-end prices.

This is an exceptionally good export mix in case of a mid-cap Indian auto ancillary.

Peer Comparison: Where Hero Motors Really Stands

Key Observations

Hero Motors has:

• The lowest growth
• The lowest margins
• The lowest ROCE
• Equivalent leverage to Craftsman.
• Less strong balance sheet than Endurance.

Yet it trades at:

• The highest P/E
• The highest P/S
• The highest P/BV

The EV/EBITDA is the sole value that appears to be cheap, however, EBITDA is depressed during the capex stage, so this would be misleading.

In simple terms:

The stock has been valued to include a turnaround that is yet to occur.

Promoter Control: Stability or Governance Risk?

The company is owned by promoters and promoter group with a share of about 85.25.

Pros

• Strong strategic stability
• Long-term business vision
• No takeover risk
• Skin in the game.

Cons

• Minority shareholder weak influence.
• Risk of governance and allocation of capitals.
• Restricted liquidity and free float.

This is a classic trade-off:

control premium - governance discount.

The Question of the Core Investment.

Hero Motors is an unsafe compounder.

Capex based turnaround + EV optionality story.

The result of your action is only determined by whether:

• New scales of capacity are meaningfully scaled.
• EV orders materialise
• Export growth accelerates
• Margins recover toward 12–14%
• ROCE normalises above 12%
• Debt starts falling

Should such occur, the current valuation may appear sensible in retrospect.

Otherwise, the stock is susceptible to vicious de-rating.

Bull, Base and Bear Case Scenarios.

Bull Case (High Reward)

• EV revenues scale rapidly
• Capacity utilisation jumps
• EBITDA margin expands to 13–15%
• ROCE crosses 14%
• Stock rerates as EV-auto ancillary hybrid.

Base Case (Moderate Outcome)

• Revenue grows 12–14% CAGR
• Margins recover gradually
• ROCE improves to 9–11%
• Valuation is within the range.

Bear Case (Capital Risk)

• EV demand disappoints
• Utilisation stays weak
• Debt remains elevated
• Margins stay compressed
• Valuation de-rates sharply

Real Investor Risks to Take into consideration.

This is not a low-risk story.

1) Execution Risk

New capabilities should increase gradually. Any under-utilisation or delay increases losses and stresses to the balance sheets.

2) EV Adoption Risk

EV orders can increase at a slow rate. EV components remain a small base business.

3) Leverage Risk

The Debt / Equity of approximately 1x does not allow much leeway to make errors in operation.

4) Valuation Risk

Already, expectations are high at the current prices. Sharp de-rating can be caused by any disappointment.

5) Governance & Liquidity Risk

The promoter encourages high control and minority influence, and free float liquidity.

Overall Conclusion: A High-Risk, High-Optionability Turnaround Bet.

Hero Motors is not a good growth story today.

It is an investment concentrated on infrastructure which is heavy on capex in the auto ancillary category.

It is a combination of a regulatory-compliant scale of manufacturing, EV alliances, exposure to exports, and technology pivot-long-term.

Conclusion :
Hero Motors (unlisted) is a capex-led turnaround story with strong EV optionality, export strength, and strategic partnerships, but current returns and margins remain weak. The valuation already factors in future improvement, making execution the key trigger for value creation. For investors tracking this opportunity in the unlisted market, including platforms like Sharescart, upside depends on utilisation, EV scaling, and margin recovery — otherwise, downside risk remains.

Disclaimer:
This analysis is for educational and informational purposes only. Investors should conduct their own research and consult a financial advisor before making any investment decisions.