Hero Motors Limited IPO

01At a glance

What the company does: designs, prototypes, validates, develops and delivers powertrain solutions for electric and non-electric vehicles, used in two-wheelers, performance vehicles, e-bikes, off-road vehicles, electric and hybrid cars, heavy vehicles and eVTOL aircraft, in two segments: Powertrain Solutions, and Alloys and Metallics (A&M) (DRHP p.27). It is a separate, unlisted company from the listed Hero MotoCorp, which the document names as one of its customers (DRHP p.1, DRHP p.48).

Who pays it: vehicle and e-bike makers; the largest customer was 40.08% of revenue in the nine months to December 2024 and the top ten 74.46%, including Hero MotoCorp, BMW AG, Enviolo, HWA AG, Makino Auto Industries and Ducati (DRHP p.48). Europe provided 26.27% of revenue (DRHP p.44).

Why it is raising money: ₹2,850.00 million to repay borrowings, ₹2,370.00 million for equipment to expand capacity at its Gautam Buddha Nagar, Uttar Pradesh plant, and the rest for unidentified acquisitions and general purposes (DRHP p.28).

How fast it has grown: revenue of ₹9,142 million in FY22, ₹10,546 million in FY23 and ₹10,644 million in FY24, and ₹8,073 million in the nine months to December 2024 (DRHP p.27).

The one thing to understand: flat revenue and falling reported profit, with the mix shifting inside it. Reported EBITDA margin fell from 18.37% in FY22 to 7.78% in FY24, as FY22 included a ₹657.41 million exceptional gain and later years carried ₹133.50 million and ₹394.62 million of share-based pay; adjusted EBITDA rose from ₹1,021.93 million to ₹1,222.70 million (DRHP p.31). E-bike powertrain revenue fell from ₹2,298.05 million in FY23 to ₹1,007.62 million in FY24 while gears and transmissions nearly doubled (DRHP p.27).

02The business, in plain words

A powertrain supplier designs and makes the parts that carry power from an engine or motor to the wheels, gears, transmissions and drive units, to each vehicle maker's specification, and supplies them for the maker's vehicles.

A motorcycle maker develops a new model → it engages Hero Motors to design and validate the transmission → Hero Motors makes the gear sets and ships them → the maker pays on agreed terms.

Earnings equation: Profit ≈ parts supplied × (price − metal and machining cost) − engineering and staff costs − depreciation − interest. Adjusted EBITDA was ₹864.91 million, or 10.71% of revenue, in the nine months to December 2024 (our arithmetic, DRHP p.31).

03Where the money comes from

Source: DRHP p.27, DRHP p.44, DRHP p.48.

04The growth record

Source: DRHP p.31, DRHP p.94. Adjusted EBITDA excludes share-based payments and the FY22 exceptional gain (DRHP p.31).

Our arithmetic: revenue grew about 7.9% a year from FY22 to FY24 while profit fell about 58.5% a year, and adjusted EBITDA margin went from 11.2% to 11.5% (our arithmetic, DRHP p.31).

05What the growth is made of

A shift to gears and transmissions. That line grew from ₹1,480.04 million in FY22 to ₹4,180.49 million in FY24, including ₹259.02 million for electric vehicles, while A&M revenue fell from ₹5,944.35 million in FY23 to ₹5,441.55 million in FY24 and bike powertrain more than halved (DRHP p.27).

06Earnings quality

Operating cash flow of ₹2,980.64 million over FY22 to the nine months to December 2024 compares with profit of ₹1,789.56 million, but capital spending on property, plant and equipment was ₹4,133.99 million over the same period (our arithmetic, DRHP p.94). Share-based payments under ESOP 2022 were ₹639.26 million over the three reported periods since FY23 (our arithmetic, DRHP p.31).

07The balance sheet

Source: DRHP p.31. Share capital rose in FY23 when new shares were allotted to Hero Cycles' shareholders under a 2022 scheme of arrangement, with a demerger deficit of ₹7,528.00 million set against reserves (DRHP p.31).

08What the money is for

Source: DRHP p.28. A pre-IPO placement of up to ₹1,600 million may be made (DRHP p.28).

09Who is selling

Source: DRHP p.28, DRHP p.29. Shares acquired in the last three years cost a weighted average of ₹4.83, in a range of ₹0.03 to ₹69.14 (DRHP p.42).

10Promoters

The promoters are Pankaj Munjal, Charu Munjal, Abhishek Munjal and O P Munjal Holdings, whose shares are held by Pankaj Munjal on its behalf; together they hold 73.97% (DRHP p.27, DRHP p.29). Proceedings against the promoters include one criminal, one regulatory and one civil matter (DRHP p.33).

11Who already owns it

Source: DRHP p.28, DRHP p.29. The second and last rows are our arithmetic.

12What changed just before the IPO

• ESOP 2022: share-based pay charged from FY23 (DRHP p.31).
• E-bike drives: revenue down by more than half in FY24 (DRHP p.27).
• Borrowings: up ₹700 million in the nine months to December 2024 (DRHP p.31).

13Capacity and expansion

The proceeds fund ₹2,370.00 million of equipment to expand the Gautam Buddha Nagar, Uttar Pradesh plant (DRHP p.28). Capital spending on plant was ₹1,064.31 million in the nine months to December 2024 (DRHP p.94).

14Market size and industry structure

The industry report cited in the offer document expects electric motorcycles to rise from 1.4% of global motorcycle sales in 2024 to 7% to 9% in 2029 (DRHP p.27). That projection is the report's, and newboard has not tested it.

15Competitive position

What the document claims, and what it rests on:

• Global customers: BMW, Ducati, Hero MotoCorp and others (DRHP p.48).
• Engineering to delivery: design, prototyping and validation as well as production (DRHP p.27).
• Both electric and combustion powertrains (DRHP p.27).

Against that: one customer near 40% of revenue, dependence on Europe, falling e-bike revenue and higher debt (DRHP p.27, DRHP p.44, DRHP p.48).

16Peers the company named

Source: DRHP p.157. The table also lists Varroc Engineering; the peers' average P/E is 43.37 (DRHP p.156).

No P/E is possible for the company until a price band is set.

17Risks, in plain words

• One customer. About 40% of revenue (DRHP p.48).
• Europe. A quarter or more of revenue (DRHP p.44).
• E-bike slump. Bike powertrain revenue more than halved in FY24 (DRHP p.27).
• Returns. Return on net worth of 4.42% in FY24 (DRHP p.156).
• Acquisitions. Part of the proceeds may fund unidentified acquisitions (DRHP p.28).

18Litigation and regulatory matters

Source: DRHP p.33. The matters against directors include ones against Pankaj Munjal (DRHP p.33).

19Related-party transactions

Not read in detail for this study.

20What the offer document does not say

In the sections read for this study, the document does not give:

• Who the largest customer is, at about 40% of revenue, in the pages read.
• Why e-bike powertrain revenue fell, in the pages read.
• What the 17 regulatory proceedings against the company concern, in the pages read.
• Figures after December 2024, as the filing predates them.
• The price band, lot size or issue dates, which is normal at DRHP stage.

21Five questions for management

1. Who is the largest customer, and how long are its contracts?
2. What caused e-bike powertrain revenue to halve?
3. How much capacity will the ₹2,370 million of equipment add?
4. What acquisitions might the unidentified-acquisitions object fund?
5. How will share-based pay affect future profit?

1Sources and cited facts

This study was read from 1 document the company filed. The 45 figures it cites are listed under the document each came from, with the page and the sentence as printed.