Hero Motocorp - 2QFY12 Results - First Take: PAT growth driven by lower RM expense ratio while royalty expenses increase:: JPMorgan,

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Hero Motocorp’s 2Q PAT at Rs.6B (+19% yoy) was above ours and street
estimates. The variance was driven by improved profitability given a -220bp
decline in the raw material cost ratio and a -270bp yoy decline in the tax
payout ratio. However, this was partially offset by higher depreciation &
royalty charges (+16% qoq).
 Revenue growth: The OEM reported revenues of Rs.58.3B (+28% yoy)
driven by a 20% growth in volumes and a 7% increase in realizations. The
volume growth was driven by scooters (+32% yoy) while motorbikes grew
at +19% yoy.
 Operating metrics: The raw material expense ratio came in at 72.5%
(-220bp qoq) as the OEM benefited from lower commodity costs and price
hikes taken over the year. However, other expense ratio (ex of royalty
charges) has risen to 8.7% (+70bp qoq), given higher branding / advertising
expenses in the quarter - post the change in corporate identity.
 Depreciation expenses (including royalty charges) in the quarter were
significantly above our estimates as they include the impact of the
weakening local currency vs the JPY. (We await clarity on the same).
 We will revert with further details post management’s conference call
tomorrow at 1:00pm India time – dial in nos are +91 22 6629 0282/ +91 22
3065 2496. We await clarity on a) industry growth outlook given that rising
inflation may impact demand over 2H b) management’s strategy over the
medium term - in their recent brand launch in London, they had highlighted
their target to achieve 10m units in sales over the next 5-6 years c) Outlook
on the competitive environment.