Hero MotoCorp VRS scheme could lead firm's path to efficiency; brokerage sees 29% upside

A voluntary retirement scheme (VRS) by Hero MotoCorp, India's largest two-wheeler manufacturer by volumes, could help the auto giant reduce its employee costs and improve efficiency, according to Prabhudas Lilladher analysts.

Hero MotoCorp is India's largest two-wheeler manufacturer by volumes. | Image: Reuters

Domestic brokerage Prabhudas Lilladher has raised its target price for Hero MotoCorp to Rs 3,135 per share, which implies upside potential of 29 percent from the two-wheeler giant's current stock price of Rs 2,423 apiece (closing price on NSE on Thursday). The upward revision in the Hero MotoCorp target price by Prabhudas Lilladher comes as analysts believe the auto maker's voluntary retirement scheme (VRS) could help it reduce employee costs and improve efficiency.

Hero MotoCorp is India's largest two-wheeler manufacturer by volumes.

"HMCL's employee cost over the years has risen sharply when compared with other 2W OEMs and there was a need to keep it in check," Prabhudas Lilladher analysts wrote in a report released on April 6.

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On Wednesday, Hero MotoCorp announced the launch of a voluntary retirement scheme for its staff with the objective of retaining employee welfare "at its core" and to build a "robust organisation".

The VRS has been designed keeping in mind the vision to make Hero MotoCorp an "agile and 'future-ready', consolidating roles and reducing layers to increase empowerment and agility," Hero Moto said in a statement, adding: "We expect this to improve efficiency within the Company through a lean and more productive organisation."

The Hero MotoCorp's VRS scheme will be applicable to all staff members and includes a one-time lump-sum amount, variable pay, gifts, medical coverage, retention of company
car, relocation assistance and career support.

According to Prabhudhar Lilladher analysts, the VRS scheme should help HMCL reduce employee costs by 80-120 bps. Over the years, Hero MotoCorp's employee costs have substantially outgrown volumes and revenue growth, rising by 270 bps to 6.4 per cent in FY23E from 3.7 per cent in FY14.

Rival TVS Motor and Bajaj Auto have fared much better during this period, with the increase being at 90 bps and 30 bps respectively, according to the brokerage.

The average employee cost per vehicle for Bajaj Auto and TVS is lower by 12-19 per cent compared with Hero MotoCorp, according to the report.

Hero MotoCorp sells 5.20 lakh units of motorcycles and scooters in March 2023

Hero MotoCorp sold 5,19,342 two-wheelers in March 2023, translating into double-digit growth of 15 per cent over the corresponding period a year ago.

Riding on the positive demand of its popular two-wheelers in the month of March 2023, Hero MotoCorp further consolidated its leadership position by surpassing 5.3 million unit sales in the Financial Year (FY) 2023 (April 2022-March 2023).

The company sold 53,28,546 units in FY23, registering healthy growth of eight per cent on a year-on-year basis.

Hero MotoCorp share price: Historical performance

As of April 6, Hero MotoCorp shares have lost about 11 per cent of their value on a year-to-date basis, sharply underperforming the Nifty50 index's three per cent fall.

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