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Excessive optimism
Hero Motocorp’s (HMCL) stock has risen 22% in the last 1m and at 19x FY12
P/E seems to be pricing in excessive optimism. Our long-term DCF analysis
suggests that one needs to be a believer in 2W penetration rising to 200%+
of affording households and only a modest drop in market share to HMSI to
justify any upside from current levels. We see cyclical risks to 2W growth in
the near-term and structural risks to both 2W growth and HMCL’s market
share in the medium to long term. We reiterate U-PF on HMCL.
2W industry growth has to slow down eventually
India’s 2W penetration as % of affording households will approach 100% in five
years if the industry grows at 12% till then. Post that, we believe growth will slow
down towards mid single digit levels. This thesis has already played out in
Thailand where 2W sales have not grown since 2005 after penetration levels
crossed 80% of households. Even in the near-term, we see risks to 2W growth in
2HFY12 and FY13 given a visibly slowing economy. We note that 2W industry
growth at 26% Cagr over FY09-11 and 16% in YTD FY12 is substantially above
historical trend growth of 9% over FY90-11.
Competition to rise sharply in coming years
HMSI will grow its capacity by 150% and its dealer network by more than 200%
in two years. We expect multiple bike launches from HMSI FY13 onwards targeted
at the 100cc space, which was confirmed in our recent call with Honda Japan’s
management. We believe that getting a bike right in India requires some ‘trial and
error’ and that companies need to launch multiple bikes in order to achieve few
successes. This is what HMSI has not been doing in India thus far (even in the
premium segment) and this is what it is likely to do now post the end of the Hero
Honda JV. HMCL will also need to go up a learning curve before it gets its own
bikes right. We believe that the dominance of the ‘Splendor-Passion’ duo will not
last in perpetuity and see market share losses ahead for HMCL.
We see near-term cyclical & long-term structural headwinds for HMCL
We believe that HMCL’s PE multiple has expanded near-term due to its defensive
characteristics and the risk aversion that has engulfed the markets while nearterm
cyclical and long-term structural risks are being ignored. Our base case for
HMCL is an industry growth of 9-10% over FY12-20, 3-5% over FY21-30 (which
will take 2W penetration to 140-150% of affording households), an eventual
market share of 33-35% (45% currently) and a strong growth in exports to 18%
of sales by FY30. This throws up a DCF value range of Rs1,815-2,021, which
implies 8-18% downside and 14-15x FY13 P/E even accounting for superior cash
flow characteristics. We view risk-reward as unfavourable and maintain U-PF with
a revised target price of Rs1875 at 14x FY13 P/E (13x earlier).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Excessive optimism
Hero Motocorp’s (HMCL) stock has risen 22% in the last 1m and at 19x FY12
P/E seems to be pricing in excessive optimism. Our long-term DCF analysis
suggests that one needs to be a believer in 2W penetration rising to 200%+
of affording households and only a modest drop in market share to HMSI to
justify any upside from current levels. We see cyclical risks to 2W growth in
the near-term and structural risks to both 2W growth and HMCL’s market
share in the medium to long term. We reiterate U-PF on HMCL.
2W industry growth has to slow down eventually
India’s 2W penetration as % of affording households will approach 100% in five
years if the industry grows at 12% till then. Post that, we believe growth will slow
down towards mid single digit levels. This thesis has already played out in
Thailand where 2W sales have not grown since 2005 after penetration levels
crossed 80% of households. Even in the near-term, we see risks to 2W growth in
2HFY12 and FY13 given a visibly slowing economy. We note that 2W industry
growth at 26% Cagr over FY09-11 and 16% in YTD FY12 is substantially above
historical trend growth of 9% over FY90-11.
Competition to rise sharply in coming years
HMSI will grow its capacity by 150% and its dealer network by more than 200%
in two years. We expect multiple bike launches from HMSI FY13 onwards targeted
at the 100cc space, which was confirmed in our recent call with Honda Japan’s
management. We believe that getting a bike right in India requires some ‘trial and
error’ and that companies need to launch multiple bikes in order to achieve few
successes. This is what HMSI has not been doing in India thus far (even in the
premium segment) and this is what it is likely to do now post the end of the Hero
Honda JV. HMCL will also need to go up a learning curve before it gets its own
bikes right. We believe that the dominance of the ‘Splendor-Passion’ duo will not
last in perpetuity and see market share losses ahead for HMCL.
We see near-term cyclical & long-term structural headwinds for HMCL
We believe that HMCL’s PE multiple has expanded near-term due to its defensive
characteristics and the risk aversion that has engulfed the markets while nearterm
cyclical and long-term structural risks are being ignored. Our base case for
HMCL is an industry growth of 9-10% over FY12-20, 3-5% over FY21-30 (which
will take 2W penetration to 140-150% of affording households), an eventual
market share of 33-35% (45% currently) and a strong growth in exports to 18%
of sales by FY30. This throws up a DCF value range of Rs1,815-2,021, which
implies 8-18% downside and 14-15x FY13 P/E even accounting for superior cash
flow characteristics. We view risk-reward as unfavourable and maintain U-PF with
a revised target price of Rs1875 at 14x FY13 P/E (13x earlier).
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