Stating that Hero MotoCorp might be entering a downward spiral and that it was being seen as a rural proxy, the global brokerage firm has cut the stock’s target price to INR 3,300, the lowest on the Street while reiterating their ‘sell’ rating on the same.

The target price indicates a downside potential of 35.5% over the stock’s Thursday’s closing price.

The market appears to like Hero as a rural proxy, while expecting a rural demand revival in commuter motorcycles and perceiving a turnaround in its premium 2-wheelers, said the report by UBS.

“We think that optimism is misplaced. Our updated and detailed analysis shows the market is too optimistic regarding Hero's rural moat and not pricing in large and rising downside risks from competition and a rural shift toward electrification, premiumisation and scooterisation” said Pramod Kumar, Analyst at UBS.

Of Hero's volume, 77% comes from domestic commuter motorcycles (100-110cc), even as the company has launched multiple premium motorcycles and scooters.

Additionally, only five states account for more than half of Hero's volume vs one-third of industry volume, restricting Hero's leadership to just six of the 28 Indian states.

“Hero has lost market share even in those states, while being relegated to third or below in 15 of the remaining 22. We think this concentration makes Hero quite vulnerable, given the rapid rise of EV adoption in these markets, along with TVS and Honda's share gains,” the global brokerage firm said.

The assumption of a demand revival for commuter motorcycles, led by a rural recovery resulting in a bounce in Hero's market share, has been a key reason for valuation re-rating and optimistic earnings expectations.

Due to EVs and a pick-up in premiumisation/ scooterisation, Hero's market share has fallen 320bps this year.

UBS expects the company’s share loss to accelerate as scooters hit an inflection point and EVs displace ICE commuter motorcycles in rural.

The shares of Hero MotoCorp were trading 3.7% lower at INR 4.925 on BSE around 1:30 pm.