Hero Moto's stock has outperformed the BSE Auto index by 14% since January after being an underperformer in the past two years.
It is among the few stocks in the Nifty, which have not broken their low of August 2013. This is the prime reason why traders have been accumulating the stock over the past three months.
The stock is trading at 22% premium to the BSE Auto index based on projected FY17 earnings growth compared with 37.4% average premium in the past five years, according to Bloomberg data.
Based on the early commentary of weather forecasters, traders are betting on a good monsoon this year after two consecutive years of drought.
Historical data shows that monsoon has never been in deficit for three straight years. If monsoon turns out to be normal, it will augur well for Hero Moto's volume growth as half of it is derived from the rural area. Another positive factor is the government's intent to double the rural income in five years.
Higher allocation to rural employment guarantee scheme — MGNREGA, increased agriculture credit, and better pricing for agricultural products through minimum support prices are expected to lift the agriculture contribution to the GDP.
The company's motorcycle volume grew 6.1% in 2014 and fell 3.1% in 2015. If rural consumption improves this year, volume may grow significantly. According to Bloomberg, consensus earnings per share are expected to be Rs 172 and Rs 192 for FY17 and FY18, respectively implying growth of 11% each year.
The company reported 22% earnings growth in the nine months to December 2015 despite 3% decline in the volumes. This shows that it has multiple levers to drive profitability. Gross margins improved — for the sixth quarter in a row — to 33.1% in the December quarter.
Hero is also gaining foothold in the scooter market by introducing new models such Maestro Edge and Duet.