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Hero Motocorp (HMCL)
Automobiles
Margin improvement levers limited. We maintain our SELL rating on the stock due
to rich valuations and limited triggers for EBITDA margin improvement. We believe
while volume growth in the near term is reasonably strong, risks emanate from
maintaining market share and improve profitability once Honda enters the lower-end
bike segment. We revise our target price upwards to Rs1,900 (from Rs1,800 earlier) as
we increase earnings estimates by 6-8% over FY2012-13E on 2Q beat.
Pricing power will remain limited as players expand capacity
Hero Motocorp, Bajaj Auto and Honda Motorcycles will increase two-wheeler capacities by 3.3 mn
units over the next two years of which Honda Motorcycles is adding 55% of the incremental
capacity. While we expect the domestic two-wheeler industry to grow at 13% CAGR over the next
two years and could absorb the incremental capacities without any price competition, we believe
scooter industry growth will outpace motorcycle industry growth and pricing power is likely to
remain limited in the motorcycle industry due to lower growth in volumes. Hence, we factor in
1.5% loss in market share in the domestic motorcycle segment for Hero Motocorp as Honda
launches its 100cc bike in 1QFY13E.
We estimate EBITDA margins to decline from 13% (ex rebranding cost which is one-time expense)
in 2QFY12 to 12.5% in FY2013E as we factor in – (1) 100 bps negative impact on margins due to
increase in R&D and export promotion cost offset by (2) 50 bps positive impact due to further fall
in commodity prices and cost reduction initiatives.
Conference call takeaways
The management indicated that demand for their models remains strong and October volumes
are likely to exceed 500,000 units. Rural sales form 45% of total volumes versus 38% in
FY2011. We factor in 9% yoy growth in 2HFY12E due to stiff base effect. Hero Motocorp will
have to clock 525,000 unit monthly volumes to achieve our FY2012E volume forecast. The
company expects domestic two-wheeler industry to grow by 15% yoy in FY2012E.
The management indicated that they can produce 6.5 mn two-wheelers from their existing
capacities and plans to add another plant in the next 12 months. The company expects EBITDA
margins to improve as commodity costs could fall further, in their view.
We maintain our SELL rating as we see limited triggers for EBITDA margin expansion and further
improvement in market share. We raise our target price to Rs1,900 (from Rs1,800 earlier) as we
have increased our earnings estimates by 6-8% over FY2012-13E.
Conference call takeaways
We attended the conference call organized by the management post 2QFY12 results. Key
takeaways are as follows:
The management indicated that demand for their models remains strong and October
volumes are likely to exceed 500,000 units. Rural sales now form 45% of total volumes
and are growing at a very fast pace. We factor in 9% yoy growth in 2HFY12E due to stiff
base effect. Hero Motocorp will have to clock 525,000 unit monthly volumes to achieve
our FY2012E volume forecast.
We expect domestic two-wheeler industry to grow at a healthy pace in 2HFY12E (13%
yoy) and expect Hero Motocorp to lose market share to Bajaj Auto. Bajaj has recently
launched Boxer 150cc and plans to launch new Pulsar bikes in 4QFY12E which should
help Bajaj Auto in improving their market share in 2HFY12E.
The management indicated that they can produce 6.5 mn two-wheelers from their
existing capacities and plans to add another plant in the next 12 months. We assume
they would spend close to Rs6-8 bn for adding a capacity of 1 mn units.
The company believes EBITDA margins could expand further from current levels as they
expect commodity costs to fall further from current levels. However, on the issue of
improving profitability by sourcing from non-Honda approved vendors, the management
did not indicate a timeline when they would start getting the benefit of low-cost sourcing.
Rebranding expenses have been contained at Rs1 bn and most of the expenses have been
incurred in the current quarter. We believe the management has cut its existing
advertising expenses (ex rebranding expenses) due to strong volume growth.
Staff costs have increased in the quarter due to a new wage agreement signed with
workers with effect from August 2011.
The company has not started spending on R&D and export promotion expenses which are
likely to impact profitability in FY2013-14E. If the company is not able to increase prices
to offset the impact of these additional expenses, EBITDA margins are unlikely to improve.
The company plans to increase exports to 1 mn units annually in the next five years from
150,000 units currently. Main markets which will be targeted include Latin America,
Africa and S. East Asia. We believe it will be very difficult for the company to achieve
these targets and maintain profitability as well. If the company chases volumes
aggressively in markets like Africa, profitability could be impacted, in our view.
We revise our earnings upwards due to positive surprise in 2QFY12 results
We have revised our earnings estimates upwards by 6-8% over FY2012-13E which is driven
by the following assumptions:
We expect Hero Motocorp volume growth to moderate to 9% in 2HFY12E and expect
the company to lose 1.5% market share in the domestic motorcycle segment to Honda as
Honda launches its 100cc bike in 1QFY13E at an affordable price point. We expect
domestic two-wheeler industry to grow by 14% yoy in FY2013E. We have increased our
volume estimates slightly to factor in higher-than-expected growth in scooters.
We have revised our EBITDA margins estimates by 60-90 bps over FY2012-13E as we
factor in lower raw material costs. We estimate EBITDA margins to decline from 13% (ex
rebranding cost which is one-time expense) in 2QFY12E to 12.5% in FY2013E as we
factor in – (1) 100 bps negative impact on margins due to increase in R&D and export
promotion cost offset by (2) 50 bps positive impact due to further fall in commodity
prices and cost-reduction initiatives.
We believe improvement in product mix is extremely difficult as Hero Motocorp has
limited brand equity in the premium segment and competitors will be launching much
superior products in that segment to protect their market share.
We have not yet forecasted any price reductions in FY2013E as we believe Hero
Motocorp and Bajaj Auto will not enter a price war and sacrifice margins for market share.
Hence, we assume loss of market share and no adverse impact on margins. However, the
scenario could change if volume growth of the industry falls to single digits.
We maintain our SELL rating on the stock and revise our target price to Rs1,900 (from
Rs1,800 earlier) based on 14X FY2013E EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hero Motocorp (HMCL)
Automobiles
Margin improvement levers limited. We maintain our SELL rating on the stock due
to rich valuations and limited triggers for EBITDA margin improvement. We believe
while volume growth in the near term is reasonably strong, risks emanate from
maintaining market share and improve profitability once Honda enters the lower-end
bike segment. We revise our target price upwards to Rs1,900 (from Rs1,800 earlier) as
we increase earnings estimates by 6-8% over FY2012-13E on 2Q beat.
Pricing power will remain limited as players expand capacity
Hero Motocorp, Bajaj Auto and Honda Motorcycles will increase two-wheeler capacities by 3.3 mn
units over the next two years of which Honda Motorcycles is adding 55% of the incremental
capacity. While we expect the domestic two-wheeler industry to grow at 13% CAGR over the next
two years and could absorb the incremental capacities without any price competition, we believe
scooter industry growth will outpace motorcycle industry growth and pricing power is likely to
remain limited in the motorcycle industry due to lower growth in volumes. Hence, we factor in
1.5% loss in market share in the domestic motorcycle segment for Hero Motocorp as Honda
launches its 100cc bike in 1QFY13E.
We estimate EBITDA margins to decline from 13% (ex rebranding cost which is one-time expense)
in 2QFY12 to 12.5% in FY2013E as we factor in – (1) 100 bps negative impact on margins due to
increase in R&D and export promotion cost offset by (2) 50 bps positive impact due to further fall
in commodity prices and cost reduction initiatives.
Conference call takeaways
The management indicated that demand for their models remains strong and October volumes
are likely to exceed 500,000 units. Rural sales form 45% of total volumes versus 38% in
FY2011. We factor in 9% yoy growth in 2HFY12E due to stiff base effect. Hero Motocorp will
have to clock 525,000 unit monthly volumes to achieve our FY2012E volume forecast. The
company expects domestic two-wheeler industry to grow by 15% yoy in FY2012E.
The management indicated that they can produce 6.5 mn two-wheelers from their existing
capacities and plans to add another plant in the next 12 months. The company expects EBITDA
margins to improve as commodity costs could fall further, in their view.
We maintain our SELL rating as we see limited triggers for EBITDA margin expansion and further
improvement in market share. We raise our target price to Rs1,900 (from Rs1,800 earlier) as we
have increased our earnings estimates by 6-8% over FY2012-13E.
Conference call takeaways
We attended the conference call organized by the management post 2QFY12 results. Key
takeaways are as follows:
The management indicated that demand for their models remains strong and October
volumes are likely to exceed 500,000 units. Rural sales now form 45% of total volumes
and are growing at a very fast pace. We factor in 9% yoy growth in 2HFY12E due to stiff
base effect. Hero Motocorp will have to clock 525,000 unit monthly volumes to achieve
our FY2012E volume forecast.
We expect domestic two-wheeler industry to grow at a healthy pace in 2HFY12E (13%
yoy) and expect Hero Motocorp to lose market share to Bajaj Auto. Bajaj has recently
launched Boxer 150cc and plans to launch new Pulsar bikes in 4QFY12E which should
help Bajaj Auto in improving their market share in 2HFY12E.
The management indicated that they can produce 6.5 mn two-wheelers from their
existing capacities and plans to add another plant in the next 12 months. We assume
they would spend close to Rs6-8 bn for adding a capacity of 1 mn units.
The company believes EBITDA margins could expand further from current levels as they
expect commodity costs to fall further from current levels. However, on the issue of
improving profitability by sourcing from non-Honda approved vendors, the management
did not indicate a timeline when they would start getting the benefit of low-cost sourcing.
Rebranding expenses have been contained at Rs1 bn and most of the expenses have been
incurred in the current quarter. We believe the management has cut its existing
advertising expenses (ex rebranding expenses) due to strong volume growth.
Staff costs have increased in the quarter due to a new wage agreement signed with
workers with effect from August 2011.
The company has not started spending on R&D and export promotion expenses which are
likely to impact profitability in FY2013-14E. If the company is not able to increase prices
to offset the impact of these additional expenses, EBITDA margins are unlikely to improve.
The company plans to increase exports to 1 mn units annually in the next five years from
150,000 units currently. Main markets which will be targeted include Latin America,
Africa and S. East Asia. We believe it will be very difficult for the company to achieve
these targets and maintain profitability as well. If the company chases volumes
aggressively in markets like Africa, profitability could be impacted, in our view.
We revise our earnings upwards due to positive surprise in 2QFY12 results
We have revised our earnings estimates upwards by 6-8% over FY2012-13E which is driven
by the following assumptions:
We expect Hero Motocorp volume growth to moderate to 9% in 2HFY12E and expect
the company to lose 1.5% market share in the domestic motorcycle segment to Honda as
Honda launches its 100cc bike in 1QFY13E at an affordable price point. We expect
domestic two-wheeler industry to grow by 14% yoy in FY2013E. We have increased our
volume estimates slightly to factor in higher-than-expected growth in scooters.
We have revised our EBITDA margins estimates by 60-90 bps over FY2012-13E as we
factor in lower raw material costs. We estimate EBITDA margins to decline from 13% (ex
rebranding cost which is one-time expense) in 2QFY12E to 12.5% in FY2013E as we
factor in – (1) 100 bps negative impact on margins due to increase in R&D and export
promotion cost offset by (2) 50 bps positive impact due to further fall in commodity
prices and cost-reduction initiatives.
We believe improvement in product mix is extremely difficult as Hero Motocorp has
limited brand equity in the premium segment and competitors will be launching much
superior products in that segment to protect their market share.
We have not yet forecasted any price reductions in FY2013E as we believe Hero
Motocorp and Bajaj Auto will not enter a price war and sacrifice margins for market share.
Hence, we assume loss of market share and no adverse impact on margins. However, the
scenario could change if volume growth of the industry falls to single digits.
We maintain our SELL rating on the stock and revise our target price to Rs1,900 (from
Rs1,800 earlier) based on 14X FY2013E EPS.
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