Hero MotoCorp share price tanks 6% after Income Tax Department finds irregularities; what should investors do?

Hero MotoCorp share price tanked over 6 per cent on Friday amid fresh concerns related to the Income Tax department detecting multiple irregularities after raids on the auto company. The stock plunged 6.32 per cent to Rs 2,151.60 on the BSE after the I-T Dept in its probe found alleged illegal business expenses of over Rs 800 crore; “unaccounted” cash of Rs 60 crore used to purchase land in Delhi; and role of some shell companies after it raided Hero MotoCorp and two other groups. The raids were launched on 23 March, and the two-wheeler maker had then said it was extending full cooperation to the tax authorities, who visited its offices in Delhi and nearby Gurugram, apart from the residence of its chairman and CEO Pawan Munjal.

Income Tax raid findings:

The Central Board of Direct Taxes (CBDT) in its statement on Thursday said that the I-T Dept conducted a search and seizure operation on a leading automobile manufacturer group, a company operating chartered flights and a real estate group of Delhi-NCR. The Dept covered more than 35 premises across Delhi-NCR on March 23 and found various incriminating documents and digital evidence indicating bogus expenses, CBDT said.

“During the course of the search operation, various incriminating documents and digital evidence have been found and seized indicating that the expenses ostensibly shown to have been claimed towards business purposes are not fully supported by evidences,” the statement read. “Expenditure aggregating to more than Rs 800 crore has been booked in the guise of purchase of services from a specific event management entity. This entity has siphoned-off the money by way of layering,” said the release.

What should investors do?

“Investors should hold the stock for next few quarters. If investors are looking at the mid to long term horizon, Rs 2050-2080 is the mid-term support to look for and any correction will be an opportunity to accumulate stock,” said Harsh Patidar, Auto Analyst at CapitalVia Global Research.

“HeroMoto Corp is India’s largest two-wheeler manufacturer and investors should wait for the next few weeks to let this news simmer. Stock has recovered close to 4% from intraday low and has immediate support in the zone of Rs 2,140-2,160,” Patidar added.

“Such IT claims are to be taken seriously when it comes to Hero Moto, the world’s largest two-wheeler manufacturer. Post this development, shares of Hero MotoCorp plunged almost 10%, while the company has denied such claims. We believe the speculative damage is already in the price discounted and from here, the downside would be minimal based on the IT claim news. Conservative investors should hold their positions with a trading stop loss of Rs 2100 or accumulate the 2-wheeler growth story which is intact for medium term to long term,” said Prashanth Tapse, Vice President (Research), Mehta Equities.

“Technically if we look at Hero MotoCorp RSI is in the mid-range of 40’s with a trend line in the neutral zone. Rs 2150-2200 can be a good range level to “Accumulate” with medium term target of Rs 2340 resistance levels and any close above Rs 2340 we can confirm the upward strength towards Rs 2463,” he further said.

“If this allegation is proved to be true then this will cast a big doubt on the corporate governance and integrity of the group and taint the 38 year legacy of the Hero group. Technically, it is trying to find a base near the 2150 level after a sharp fall where we are seeing buying by promoters from lower levels to improve the sentiments. If it manages to hold the 2150 level then we can expect some relief rally but it has to cross the 2325-2350 supply zone decisively to gain positive momentum otherwise there will be a risk of selling pressure. If it slips below the 2150 level then we may see more pain towards the 2000 level,” said Santosh Meena, Head of Research, Swastika Investmart.

(The stock recommendations in this story are by the respective research analysts and brokerage firms. Financial Express Online does not bear any responsibility for their investment advice. Capital markets investments are subject to rules and regulations. Please consult your investment advisor before investing.)

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