The quarter's performance reflects Hero MotoCorp's ability to capitalise on India's festive season demand, traditionally the strongest period for two-wheeler sales. While the sequential profit decline raises eyebrows, it's important to contextualise this against Q1 FY26's exceptional ₹1,705.29 crores profit, which benefited from extraordinary other income. On a standalone basis, net profit stood at ₹1,419.01 crores, up 23.05% year-on-year but down from Q1's elevated levels. The company's operating margins expanded to 15.26%, the highest in recent quarters, signalling improved operational efficiency and favourable product mix.
| Metric | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 12,218.39 | 9,727.75 | 9,969.81 | 10,259.89 | 10,482.93 |
| QoQ Growth | ▲ 25.60% | ▼ 2.43% | ▼ 2.83% | ▼ 2.13% | ▲ 2.67% |
| YoY Growth | ▲ 16.56% | ▼ 4.73% | ▲ 3.67% | — | — |
| Consolidated PAT (₹ Cr) | 1,308.89 | 1,705.29 | 1,161.33 | 1,107.55 | 1,063.71 |
| QoQ Growth | ▼ 23.25% | ▲ 46.84% | ▲ 4.86% | ▲ 4.12% | ▲ 1.70% |
| YoY Growth | ▲ 23.05% | ▲ 63.05% | ▲ 24.21% | — | — |
| Operating Margin (Excl OI) | 15.26% | 14.52% | 14.45% | 14.70% | 14.65% |
| PAT Margin | 10.81% | 17.53% | 11.72% | 10.80% | 10.17% |
Financial Performance: Record Revenue Meets Margin Expansion
Hero MotoCorp's Q2 FY26 financial performance presents a tale of two narratives—record-breaking top-line growth juxtaposed against sequential profit normalisation. Net sales of ₹12,218.39 crores represent the company's highest-ever quarterly revenue, surging 25.60% quarter-on-quarter and 16.56% year-on-year. This remarkable growth was driven by robust festive season demand, particularly in rural markets, and the successful launch of premium motorcycle models including the Xtreme 160R 4V and Mavrick 440.
The operating profit (PBDIT excluding other income) reached ₹1,864.04 crores, marking the highest quarterly operating profit in the company's history. More impressively, the operating margin expanded to 15.26%, up 74 basis points from Q1 FY26's 14.52% and 61 basis points higher than the year-ago quarter. This margin expansion reflects improved product mix, with higher contribution from premium motorcycles, better capacity utilisation, and effective cost management despite inflationary pressures on raw materials.
However, the consolidated net profit of ₹1,308.89 crores, whilst up 23.05% year-on-year, declined 23.25% sequentially from Q1 FY26's ₹1,705.29 crores. This sequential decline is primarily attributable to the normalisation of other income, which stood at ₹240.39 crores in Q2 compared to ₹309.94 crores in Q1. Additionally, the tax rate increased to 25.66% from Q1's unusually low 19.77%, contributing to the profit moderation. On a half-yearly basis (H1 FY26), the company posted consolidated net profit of ₹3,014.18 crores, representing robust growth of 42.88% over H1 FY25.
The gross profit margin improved to 17.07% from 16.76% in the year-ago quarter, indicating better realisation and favourable input cost trends. Employee costs rose to ₹725.50 crores, up 7.80% year-on-year, reflecting annual increments and expanded workforce to support growth initiatives. Interest costs remained minimal at ₹19.25 crores, underscoring the company's virtually debt-free status—a significant competitive advantage in the capital-intensive automobile sector.
Operational Excellence: Capital Efficiency Drives Superior Returns
Hero MotoCorp's operational metrics reveal a company firing on all cylinders from a capital efficiency standpoint. The company's Return on Equity (ROE) stands at an impressive 22.72%, significantly higher than the industry average and demonstrating exceptional ability to generate profits from shareholder capital. This elevated ROE—up from the five-year average of 18.99%—reflects both improved profitability and efficient capital deployment. Higher ROE is a hallmark of quality businesses, and Hero MotoCorp's sustained performance above 20% positions it favourably amongst its peers.
The Return on Capital Employed (ROCE) paints an even more compelling picture at 40.13%, substantially above the five-year average of 32.71%. This exceptional ROCE indicates that every rupee invested in the business generates 40 paise of operating profit, a testament to Hero MotoCorp's asset-light business model and superior operational efficiency. The company's sales to capital employed ratio of 1.94x further validates its ability to generate substantial revenue from its capital base.
Balance Sheet Strength: A Fortress of Financial Stability
Hero MotoCorp operates with virtually zero debt, boasting a net debt-to-equity ratio of -0.34, making it effectively a net cash company. With shareholder funds of ₹19,272 crores as of March 2025 and investments of ₹7,748 crores, the company maintains a robust financial cushion. The debt-to-EBITDA ratio of just 0.14 and interest coverage ratio of 61.29x provide enormous financial flexibility for growth investments, acquisitions, and shareholder returns. This pristine balance sheet positions Hero MotoCorp to weather economic downturns and capitalise on growth opportunities without financial constraints.
The company's working capital management deserves special mention. Current assets of ₹13,433.89 crores comfortably exceed current liabilities of ₹7,475.98 crores, providing a healthy current ratio and ensuring operational liquidity. Trade payables increased to ₹5,699.66 crores, reflecting higher procurement volumes aligned with the festive season production ramp-up. The company generated operating cash flow of ₹4,297 crores in FY25, though this was lower than the previous year's ₹4,923 crores due to working capital build-up.
Key Operational Strengths
✓ Exceptional ROE of 22.72%: Significantly above industry average, demonstrating superior capital efficiency and profitability generation from shareholder funds.
✓ Outstanding ROCE of 40.13%: Among the highest in the automobile sector, reflecting excellent asset utilisation and operational effectiveness.
✓ Debt-Free Balance Sheet: Net debt-to-equity of -0.34 provides unmatched financial flexibility and resilience against economic uncertainties.
✓ Robust Cash Generation: Operating cash flow of ₹4,297 crores in FY25 supports growth investments and generous dividend payouts.
Market Dynamics: Navigating Competitive Intensity and EV Transition
Hero MotoCorp operates in India's highly competitive two-wheeler market, which is undergoing a structural transformation with the accelerating shift towards electric vehicles. Despite maintaining market leadership in the internal combustion engine (ICE) segment, the company faces intensifying competition from established players like Honda Motorcycle & Scooter India, TVS Motor Company, and Bajaj Auto, alongside emerging electric vehicle manufacturers such as Ola Electric and Ather Energy.
The domestic two-wheeler industry witnessed a revival in FY25, with annual sales growth of 8.30% for Hero MotoCorp outpacing the broader industry growth. Rural demand, which accounts for a significant portion of Hero's volumes, showed encouraging signs of recovery supported by normal monsoons, stable agricultural commodity prices, and improving rural income levels. The festive season (Q2 and early Q3) traditionally accounts for 35-40% of annual two-wheeler sales, and Hero's 25.60% sequential revenue growth in Q2 FY26 suggests the company captured its fair share of this demand surge.
However, the elephant in the room remains the electric vehicle transition. Electric two-wheelers penetration in India reached approximately 6-7% of total sales in calendar year 2024, up from negligible levels three years ago. Hero MotoCorp's electric vehicle subsidiary, Hero Electric, has struggled to gain meaningful traction, and the company's recent partnership with Zero Motorcycles for premium electric motorcycles is still in nascent stages. The absence of a strong EV portfolio represents both a near-term risk and a medium-term opportunity, depending on execution speed.
| Company | P/E (TTM) | P/BV | ROE % | Debt/Equity | Div Yield % |
|---|---|---|---|---|---|
| Hero MotoCorp | 21.87 | 5.72 | 18.99 | -0.34 | 3.00 |
| Hyundai Motor India | 34.31 | — | — | — | — |
| Eicher Motors | 38.72 | 8.80 | 17.78 | -0.03 | 1.02 |
| TVS Motor Company | 62.76 | 20.18 | 25.01 | 1.42 | 0.29 |
| Tata Motors Passenger Vehicles | 6.78 | 1.26 | 12.34 | 0.03 | — |
Hero MotoCorp's valuation multiples appear reasonable relative to peers. Trading at a P/E ratio of 21.87x, the stock commands a significant discount to Eicher Motors (38.72x) and TVS Motor (62.76x), whilst offering superior ROE of 18.99% and a more attractive dividend yield of 3.00%. The P/BV ratio of 5.72x is substantially lower than TVS Motor's 20.18x, despite comparable operational metrics. This valuation discount partly reflects market concerns about Hero's slower EV transition and heavy dependence on the mass-market motorcycle segment, which faces greater commoditisation pressure.
Valuation Analysis: Attractive Entry Point for Patient Investors
Hero MotoCorp's current valuation presents a compelling risk-reward proposition for long-term investors. At ₹5,483.85, the stock trades at a P/E multiple of 21.87x trailing twelve-month earnings—a notable discount to its own five-year average and significantly below premium peers like Eicher Motors and TVS Motor Company. The Price-to-Book Value ratio of 5.72x, whilst elevated in absolute terms, appears justified given the company's exceptional ROE of 22.72% and pristine balance sheet.
The stock's PEG ratio of 0.94 suggests the valuation is reasonable relative to growth prospects, with any reading below 1.0 traditionally considered attractive. Hero MotoCorp has demonstrated consistent long-term growth, with five-year sales CAGR of 10.96% and EBIT CAGR of 17.94%, indicating improving operational leverage. The company's dividend yield of 3.00% provides downside protection and attractive income generation, particularly in the current low-interest-rate environment.
The stock has delivered impressive returns across most timeframes, with a three-year return of 104.21% significantly outperforming the Sensex's 36.59% gain, generating alpha of 67.62 percentage points. The six-month return of 34.84% demonstrates strong recent momentum, though the one-month decline of 1.54% reflects some profit-booking after the sharp rally. The stock trades just 3.86% below its 52-week high of ₹5,704, suggesting the recent correction may offer an attractive entry point.
From a technical perspective, the stock recently transitioned to a "Bullish" trend on November 12, 2025, supported by favourable MACD, moving averages, and KST indicators. The stock trades above all major moving averages (5-day, 20-day, 50-day, 100-day, and 200-day), indicating strong underlying momentum. The valuation grade has consistently remained "Attractive" since July 2025, with brief upgrades to "Very Attractive" during market corrections, suggesting the current price offers reasonable value.
Fair Value Assessment
Based on Hero MotoCorp's historical valuation multiples, peer comparison, and growth trajectory, we estimate a fair value range of ₹6,100-6,300 per share, implying 11-15% upside from current levels. This valuation assumes the company maintains its market leadership, successfully navigates the EV transition over the next 2-3 years, and continues delivering ROE above 20%. The attractive valuation grade assigned by proprietary models, combined with strong fundamentals and reasonable growth visibility, supports accumulation at current levels for investors with a 2-3 year investment horizon.
Shareholding Pattern: Institutional Confidence Building Steadily
Hero MotoCorp's shareholding pattern reveals stable promoter holding alongside gradually increasing institutional participation, signalling growing confidence in the company's long-term prospects. Promoter holding stood at 34.73% as of September 2025, marginally declining by 1 basis point from the previous quarter but remaining stable over the past year. The promoter group, led by the Munjal family through Bahadur Chand Investments Pvt Ltd (20.01%) and other family entities, demonstrates strong commitment with zero pledging of shares—a positive indicator of financial strength and long-term conviction.
| Category | Sep'25 | Jun'25 | Mar'25 | QoQ Change |
|---|---|---|---|---|
| Promoter | 34.73% | 34.74% | 34.74% | -0.01% |
| FII | 28.76% | 27.05% | 27.43% | +1.71% |
| Mutual Funds | 14.35% | 15.52% | 16.27% | -1.17% |
| Insurance | 1.60% | 1.52% | 1.41% | +0.08% |
| Other DII | 10.45% | 10.79% | 10.23% | -0.34% |
| Non-Institutional | 10.11% | 10.38% | 9.92% | -0.27% |
Foreign Institutional Investors (FIIs) increased their stake significantly by 171 basis points quarter-on-quarter to 28.76%, the highest in recent quarters. This substantial increase reflects renewed foreign investor confidence in Hero MotoCorp's growth prospects and valuation attractiveness. With 913 FII entities holding shares, the stock enjoys broad-based international institutional support. The FII stake expansion from 27.43% in March 2025 to current levels indicates sustained buying interest despite global market volatility.
Domestic Mutual Funds reduced their holding by 117 basis points to 14.35% in Q2 FY26, continuing a declining trend from 16.27% in March 2025. This reduction appears tactical rather than fundamental, possibly reflecting portfolio rebalancing or profit-booking after the stock's strong rally. Despite the decline, 40 mutual fund schemes continue to hold Hero MotoCorp, indicating the stock remains a core holding in many portfolios. Insurance companies marginally increased their stake to 1.60%, whilst other Domestic Institutional Investors (DIIs) reduced holdings to 10.45%.
Overall institutional holdings stand at 55.15%, demonstrating strong institutional conviction in the company's long-term value proposition. The increase in FII holding, despite mutual fund reduction, suggests a rotation within institutional investors rather than broad-based selling. Non-institutional holdings declined marginally to 10.11%, maintaining relative stability. The absence of promoter pledging and stable promoter holding provides comfort regarding governance and financial stability.
Stock Performance: Impressive Multi-Year Returns with Recent Consolidation
Hero MotoCorp's stock has delivered exceptional returns across most timeframes, significantly outperforming the broader Sensex and demonstrating the company's ability to create substantial shareholder wealth. Over a three-year period, the stock has surged 104.21%, more than doubling investor capital and generating alpha of 67.62 percentage points versus the Sensex's 36.59% return. This outperformance reflects the market's recognition of Hero MotoCorp's improving fundamentals, margin expansion, and strong cash generation capabilities.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | 3.55% | 1.15% | +2.40% |
| 1 Month | -1.54% | 2.61% | -4.15% |
| 3 Months | 16.53% | 4.43% | +12.10% |
| 6 Months | 34.84% | 3.49% | +31.35% |
| YTD | 31.76% | 7.72% | +24.04% |
| 1 Year | 19.10% | 8.49% | +10.61% |
| 2 Years | 75.83% | 29.62% | +46.21% |
| 3 Years | 104.21% | 36.59% | +67.62% |
The six-month return of 34.84% and year-to-date gain of 31.76% highlight the stock's strong momentum in 2025, significantly outpacing the Sensex's modest 3.49% and 7.72% returns respectively. This outperformance has been driven by improving domestic two-wheeler demand, margin expansion, and the company's successful premium product launches. The stock has also outperformed its automobile sector peers, delivering 19.10% returns over one year compared to the sector's 16.63% return.
However, the one-month decline of 1.54% against the Sensex's 2.61% gain suggests some near-term profit-booking, particularly after the stock touched its 52-week high of ₹5,704 in recent weeks. Currently trading at ₹5,483.85, the stock is just 3.86% below its peak, indicating the recent correction has been relatively shallow. The stock's distance from its 52-week low of ₹3,322.60 stands at an impressive 65.05%, underscoring the substantial wealth creation over the past year.
From a risk-adjusted perspective, Hero MotoCorp exhibits a beta of 1.20, classifying it as a high-beta stock that tends to amplify market movements. The one-year volatility of 25.19% is higher than the Sensex's 12.26%, reflecting the stock's sensitivity to two-wheeler industry dynamics and broader market sentiment. Despite higher volatility, the risk-adjusted return of 0.76 compares favourably to the Sensex's 0.69, indicating superior returns per unit of risk taken. The positive Sharpe ratio further validates the stock's attractive risk-reward profile.
"With a three-year CAGR of 104% and consistent outperformance versus the Sensex, Hero MotoCorp demonstrates that quality businesses with strong fundamentals eventually reward patient investors, despite short-term volatility."
Investment Thesis: Quality Compounder at Reasonable Valuation
Hero MotoCorp's investment thesis rests on four pillars: exceptional quality metrics, attractive valuation, positive financial trends, and supportive technical momentum. The company's "Excellent" quality grade, maintained since August 2025, reflects its pristine balance sheet, consistent profitability, superior return ratios, and strong cash generation. With zero debt, ROE above 22%, and ROCE exceeding 40%, Hero MotoCorp exemplifies operational excellence in the automobile sector.
The valuation remains "Attractive" at current levels, with the stock trading at reasonable multiples relative to its growth prospects and peer group. The P/E ratio of 21.87x represents a significant discount to industry average of 34x, whilst the PEG ratio below 1.0 suggests the growth is not fully priced in. The financial trend turned "Positive" in the latest quarter, supported by record revenue, highest operating margins, and strong year-on-year profit growth. The technical trend transitioned to "Bullish" in mid-November, with the stock trading above all key moving averages and showing strong momentum indicators.
The company's proprietary investment score of 85/100 places it firmly in "Strong Buy" territory, reflecting the convergence of quality, valuation, and momentum factors. This score has improved from 74 in July 2025 and 52 in April 2025, indicating sustained improvement in fundamentals and market sentiment. The high institutional holding of 55.15%, absence of promoter pledging, and generous dividend yield of 3.00% provide additional comfort for long-term investors.
Key Strengths & Risk Factors
KEY STRENGTHS
- Market Leadership: World's largest two-wheeler manufacturer with dominant position in India's mass-market motorcycle segment
- Exceptional Capital Efficiency: ROE of 22.72% and ROCE of 40.13% amongst the highest in the automobile sector
- Debt-Free Balance Sheet: Net debt-to-equity of -0.34 provides unmatched financial flexibility and resilience
- Consistent Profitability: Five-year sales CAGR of 10.96% and EBIT CAGR of 17.94% demonstrate sustainable growth
- Strong Cash Generation: Operating cash flow of ₹4,297 crores supports growth investments and dividends
- Attractive Dividend Yield: 3.00% yield with payout ratio of 74.73% provides income and downside protection
- Improving Margins: Operating margin expanded to 15.26%, highest in eight quarters, reflecting better product mix
KEY CONCERNS
- EV Transition Lag: Slow progress in electric vehicle segment whilst competitors gain market share rapidly
- Mass Market Dependence: Heavy reliance on entry-level motorcycles exposes company to commoditisation pressure
- Premium Segment Challenges: Limited success in premium motorcycle segment dominated by Royal Enfield and KTM
- Rural Market Volatility: Significant exposure to rural demand which can be cyclical and weather-dependent
- Intense Competition: Market share erosion risk from Honda, TVS, Bajaj, and emerging EV players
- Sequential Profit Decline: Q2 FY26 consolidated profit down 23.25% QoQ raises sustainability concerns
- High Dividend Payout: 74.73% payout ratio limits capital available for EV investments and growth initiatives
Outlook: What Lies Ahead
POSITIVE CATALYSTS
- Festive season momentum extending into Q3 FY26 with continued strong demand
- Successful launch of premium models (Mavrick 440, Xtreme 160R 4V) driving margin expansion
- Rural demand recovery supported by normal monsoons and stable agricultural prices
- Potential market share gains in scooter segment with new product launches
- Acceleration of EV product pipeline through Zero Motorcycles partnership
RED FLAGS TO MONITOR
- Sustained sequential profit decline beyond Q2 FY26 would signal structural margin pressure
- Market share loss in core motorcycle segment to competitors
- Failure to launch competitive EV products by mid-2026
- Deterioration in rural demand due to weak monsoons or agricultural distress
- Aggressive pricing actions by competitors eroding profitability
Looking ahead, Hero MotoCorp's near-term outlook appears constructive, supported by strong festive season demand, improving rural sentiment, and successful premium product launches. The company's guidance suggests continued focus on margin expansion through premiumisation and operational efficiency improvements. However, the medium-term challenge of electric vehicle transition looms large, requiring accelerated investments and product launches to maintain market leadership.
The key monitoring points include the sustainability of operating margins above 15%, success of premium motorcycle launches in gaining market share, progress on EV product pipeline, and the ability to maintain market leadership amidst intensifying competition. Investors should also watch for any changes in the competitive landscape, particularly aggressive moves by electric two-wheeler manufacturers that could accelerate the ICE-to-EV transition faster than anticipated.
The Verdict: Quality Compounder with Attractive Risk-Reward
Score: 85/100
For Fresh Investors: Hero MotoCorp presents an excellent opportunity to own India's largest two-wheeler manufacturer at attractive valuation. The combination of exceptional quality metrics (ROE 22.72%, ROCE 40.13%), debt-free balance sheet, consistent cash generation, and reasonable P/E multiple of 21.87x creates a compelling risk-reward proposition. Accumulate in the ₹5,400-5,600 range for a 2-3 year investment horizon, with potential upside of 11-15% to fair value of ₹6,100-6,300. The 3.00% dividend yield provides downside protection whilst waiting for capital appreciation.
For Existing Holders: Continue holding with conviction. The Q2 FY26 results validate the improving operational trajectory, with record revenue and highest operating margins in eight quarters. Whilst the sequential profit decline warrants monitoring, the year-on-year growth of 23.05% and strong H1 FY26 performance demonstrate underlying strength. The stock's technical trend turning bullish and FII stake increasing to 28.76% signal renewed institutional confidence. Hold for target of ₹6,200-6,500 over the next 12-18 months.
Fair Value Estimate: ₹6,200 (13% upside from current levels)
Rationale: Hero MotoCorp's "Strong Buy" rating is anchored in its exceptional quality metrics, attractive valuation relative to peers and growth prospects, positive financial trends with record quarterly revenue and margin expansion, and supportive technical momentum. The convergence of fundamental strength and reasonable valuation creates an asymmetric risk-reward opportunity for long-term wealth creation.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions.
