Delta Investment Advisors

Hero Motors Ltd

Hero Motors Ltd is a B2B auto component maker supplying powertrain and metal components to global vehicle makers. It runs two segments: Powertrain Solutions (54% of FY26 revenue), covering gears, gearboxes and e-bike drivetrains, and Alloys & Metallics (46%), covering pressed and welded body parts. It operates 6 plants across India, the UK and Thailand and served 23 countries in FY26. Clients include BMW, Ducati, Hero MotoCorp and enviolo. It is promoted by Pankaj Munjal of the Hero Cycles group.

Auditor: Deloitte Haskins & Sells LLP BRLM: ICICI Securities, DAM Capital Advisors, JM Financial

Disclaimer - Delta Investment Partners (public market division under Dexter Capital) manages a SEBI registered Category III Alternative `Investment Fund. This report does not constitute a recommendation but is only prepared for educational purposes. We (our team members including our directors) may or may not apply to IPO. Queries: shubham@deltainvest.in

This note is not reviewed by our CIO - Devendra Agrawal, CFA. It is prepared by our team of Investment Analysts, and is reviewed by our senior team members.

Executive Summary: Skip

Hero Motors Ltd is promoted by Pankaj Munjal of the Hero Cycles group, and is separate from Hero MotoCorp. It makes gears, gearboxes, e-bike drivetrains and pressed metal parts for vehicle makers.

The IPO is priced at 30x EV/EBITDA and 94x P/E, and we would skip this issue for the following reasons alongside a high valuation:

Revenue has stagnated at a 5.7% two year CAGR against a peer median of 17%. 77% of revenue is still non-EV, and ICE passenger vehicle volumes across the US, Europe and ASEAN are forecast to fall 7% to 9% a year through 2031.

Operating margins and returns are the weakest among peers. On a three year average, its EBITDA margin of 8.3% and ROCE of 6.9% compared with peer medians of 17.7% and 15.3%.

The company has had three CFOs and three Company Secretaries in three years, with both seats vacant for over 140 days. Separately, the Hero name is licensed rather than owned, and is the subject of two live disputes between Munjal family branches.

The client base carries names like BMW, Ducati, Hero MotoCorp, Enviolo and Escorts with long relationships, but 35% of revenue sits with a single customer. Alloys & Metallics forms 46% of revenue yet posted a segment operating loss of ₹15.9 cr in FY26, and every one of the six subsidiaries was loss making too.

At the current GMP of ~7% (18 September 2026) and retail subscription of 6.3x, the issue points to flattish gains at best, if it sustains. However, it is important to note that GMP has been a poor guide of late and has been unstable. For example in recent IPOs: Skyways Air Services had a 30% GMP and listed 10% below its issue price, Symbiotec Pharmalab carried 27% and listed flat, and Annu Projects carried 8% and listed 24% below issue.

Hero Motors was incorporated in 1998 as a joint venture between Briggs & Stratton of the US and Majestic Auto. The JV ended in 2001. The business was formed in December 2022, when the auto components division of Hero Cycles was demerged into the company, so most of what is being listed has sat under this entity for under four years. The promoter is Pankaj Munjal, son of Hero Cycles co-founder Om Prakash Munjal. He is a first cousin of Pawan Munjal, who runs Hero MotoCorp, and of Vijay and Naveen Munjal, who run Hero Electric and Hero Ecotech. The businesses share the Hero name but were separated under a family settlement in 2010, and there is no cross-holding between Hero Motors and Hero MotoCorp today.

Its clients include BMW, Ducati, Hero MotoCorp, Enviolo and Escorts, with the top five relationships averaging over 12 years. However, growth has been modest. Revenue moved from ₹1,064 cr in FY24 to ₹1,188 cr in FY26, a two year CAGR of 5.7%. Concentration is high, with a single customer at 35% of revenue. The RHP does not name it, but the 25 year relationship with Hero MotoCorp and its position in Alloys and Metallics make it the likely candidate.

Hero's operating margins stand well below its peers. Sona BLW makes precision forged gears and EV traction motors, Sansera makes precision forged and machined engine and transmission parts, Sandhar makes sheet metal and body parts, Endurance makes die castings, suspension and braking systems for two-wheelers, and Happy Forgings makes heavy forged and machined components for commercial vehicles and tractors. Hero's three year average EBITDA margin is 8.3%, against Sandhar at 9.5%, Endurance at 13.3%, Sansera at 17.7%, Sona BLW at 26.6% and Happy Forgings at 29.3%. Gross margins are close to Endurance and Sandhar, but higher employee and other operating costs pull the EBITDA margin down.

Return on capital employed was 5.7%, 6.5% and 8.6% over FY24 to FY26, against a peer median of 15.3%. Growth is the slowest in the group as well, at a two year CAGR of 5.7%, while every peer except Happy Forgings grew in double digits. But even Happy Forgings, a similarly sized ₹1,546 cr business growing at a comparable 6.7%, earns a 29.3% EBITDA margin and 16.6% ROCE.

The IPO demands a valuation of ₹3,850 cr market cap (fully diluted), which is 30x EV/EBITDA and 94x P/E. This sits at the higher end. It is priced alongside Sona at 45x, Happy Forgings at 41.7x and Sansera at 37.4x on EV/EBITDA, while earning margins and returns well below all three.

Alloys and Metallics is 46.3% of revenue and posted a segment operating loss of ₹15.9 cr in FY26, against a profit of ₹29.9 cr in FY24 on flat revenue. All six subsidiaries lost money too. Hewland, the UK gearbox design and transmissions arm and the largest of them, went from a ₹16.8 cr profit to a ₹3.74 cr loss on revenue down 24%. The Thailand gearbox assembly plant lost ₹6.67 cr on revenue down 61%. The three units that carry the e-bike story lost money as well, the Yamaha motor JV ₹4.91 cr, the drive kit business ₹4.74 cr and the bicycle components arm ₹1.69 cr. Consolidated PAT of ₹41.2 cr therefore rests on the parent alone, and within it on Powertrain.

Non-EV applications are still 77% of revenue, at a time when ICE passenger vehicle volumes across the US, Europe and ASEAN are forecast to fall 7% to 9% a year through 2031. Europe is 33.59% of revenue and the end market there has stalled. Germany's e-bike sales fell 4.8% in 2025 and France's fell 16%. Hero grew 29% in Europe in FY26, but the European market itself is not growing.

The business is consuming capital faster than it converts it into revenue. Gross block rose from ₹575 cr to ₹834 cr, up 45% over two years, while revenue rose 12%, taking fixed asset turnover from 2.40x to 1.83x. The two main Indian plants already run at 78.53% and 83.34%, so incremental volume will need fresh capex. The IPO allocates ₹200 cr to 26 machines quoted by a single Italian supplier at ₹228 cr in total, before taxes, freight and installation, with the balance coming from internal accruals.

FY26 operating cash flow of ₹144 cr looks strong against EBITDA of ₹121 cr, but the bill discounting and factoring liability rose from ₹41.8 cr to ₹143 cr over the year. That ₹101 cr increase sits in other financial liabilities rather than in borrowings. Adjusted for it, operating cash flow was ₹43.1 cr, and after ₹92 cr of capex, free cash flow was negative ₹48.9 cr. FY25 was negative ₹69.9 cr on the same basis.

The company has had three CFOs and three Company Secretaries in three years, with the secretary's seat changing hands three times. The CFO position was vacant for 143 days and the Company Secretary position for 151 days, the latter falling between the DRHP and RHP filings. Attrition rose from 14.42% in FY24 to 22.24% in FY26, and permanent headcount fell 9.4% last year to 1,388. The company's stated edge is design capability, resting on 84 R&D staff and R&D spend of 7.54% of revenue.

The Hero name is under dispute within the family. The 2010 family settlement split the group and divided which branch could use the name on which products. Pankaj Munjal's side kept bicycles and auto components, Vijay Munjal's side took electric vehicles, and each now accuses the other of crossing over. Two cases are live, one in the Delhi High Court since 2019 where Vijay Munjal is challenging an arbitration award, and one in the Patna High Court filed in January 2026 where Pankaj Munjal's side is trying to stop Hero Ecotech from using Hero on bicycles. The company does not own the name. It uses it under a 2010 trademark agreement that holds only while the promoter family owns at least 26% of the equity.

Business

Hero Motors makes parts that transmit power to a vehicle's wheels, plus metal structural components, and sells them directly to vehicle makers. It also sells design and engineering services. FY26 revenue was ₹1,188 cr, up 9.1%, with gross margin of 41.7%, EBITDA of ₹121 cr and PAT of ₹41.2 cr.

Revenue splits across two segments. Powertrain Solutions contributed ₹638 cr (53.7%), of which Gears & Transmissions was ₹489 cr (41.1%) and Bike Powertrain ₹149 cr (12.5%). Alloys & Metallics contributed ₹551 cr (46.3%). On a separate cut, products classified as electric vehicle applications were 23.0% of FY26 revenue, up from 12.0% in FY24.

Gears & Transmissions makes gear sets, shafts and complete gearboxes for premium motorcycles above 600cc, performance cars and off-road vehicles. Bike Powertrain sells CVT hubs (a gearless e-bike transmission built on technology licensed from US partner enviolo), 36V hub motors made through a 90:10 JV with Yamaha Motor Japan, and complete electric drive kits under the ESYNC brand. Alloys & Metallics makes pressed and welded parts such as chain cases, swing arms and engine guards.

Customers are vehicle makers, not consumers. Named clients include BMW, Ducati, Hero MotoCorp, enviolo, Escorts, Formula Motorsport and River Mobility. It served 23 countries in FY26, down from 26 in FY24. India was 58.6% of revenue, Europe 33.6%, the US 3.9% and other markets 3.9%. The top customer was 35.6% of revenue, the top five 61.4% and the top ten 72.9%.

The value chain differs by product. Gears run through 15 in-house steps from gear blank to end-of-line testing. CVT hubs are assembly-led, with the core technology licensed and critical parts imported. Electric drive kits are integration work, with the motor sourced from the Yamaha JV and the rest bought in. Alloys & Metallics is the shortest chain: sheet to cut, form, weld, paint and dispatch.

Key inputs are gear blanks, metal sheets and bought-in electronics such as batteries, controllers and displays. Material cost was 55.0% of revenue in FY26, down from 60.2% in FY24, which drove the gross margin improvement. Sourcing is 93.9% domestic. Supplier concentration is low, with the largest supplier at 3.17% of total expenses, and the company holds no definitive supply agreements with all suppliers.

It operates 6 plants: three in Ludhiana including the Yamaha JV, one in Gautam Buddha Nagar, one in Maidenhead in the UK and one in Samut Prakan in Thailand, plus two technology centres. Blended capacity utilisation was 72.7% in FY26, but the two mature Indian plants ran at 78.5% and 83.3% while the Yamaha motor plant ran at 14.6%, the UK at 24.2% and Thailand at 3.9%. It employed 1,388 permanent staff and 707 contract workers as of March 2026.

Promoters and Leadership

The promoter is Pankaj Munjal (63), son of Hero Cycles co-founder Om Prakash Munjal, holding mainly through the family partnership O P Munjal Holdings. He stepped back to Non-Executive Chairman in July 2024 and draws no salary. His younger son Abhishek Munjal (35), with nine years of experience, is a Whole-time Director and his remuneration in FY26 was ₹ 3.4 cr.

The business is run by a professional. Amit Gupta, a chartered accountant with the Hero group since 2004, has been MD and CEO since September 2022 and was paid ₹4.29 cr in FY26. The two executives together took ₹7.65 cr, equal to 19% of FY26 consolidated PAT.

ESOPs cover 5.49% of fully diluted capital as granted. 86.7% of every option ever granted went to two people: CEO Amit Gupta (3.74% of capital) and non-executive director Keshav Misra (1.02%). Misra also owns 96% of Nuvomax Nutritionals, which the company paid ₹4.63 cr in IPO advisory fees over FY24 to FY26.

Financials