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2Q recorded a sharp EBIT margin recovery (after a 7-quarter dip) on the back of lower raw
material costs and strong pricing power. Building rupee depreciation, we raise our EPS
forecasts 4-5%. Buy as we believe that HMCL is a better play on strong rural demand and
softening commodity prices, new TP at Rs2416.50
Results deliver on management’s margin-expansion promise
For 2QFY12, Hero Motocorp Ltd (HMCL) achieved significant milestones: a successful brand
change from Hero Honda to Hero Motocorp with significant promotion, historically high sales
volume and reversal of a seven-quarter sliding trend in its EBIT margin. The results surprised
us, with a huge 16% on EBIT and 21% on normalised PAT, driven by a 220bp reduction in
raw material costs as a percentage of net sales, as well as vehicle price hikes (1.5% qoq)
offsetting higher royalty charges towards rupee deprecation. Normalised EPS for the quarter
is Rs33.2, representing growth of 31% yoy and 19% mom adjusted for a Rs600m one-time
brand-change cost.
We raise our EPS forecasts, already higher than consensus, an additional 4-5%
Bloomberg consensus EPS for FY12 was nearly 9% below our forecast (pre-results). Given
better-than-expected results, we believe consensus will catch up with our estimates soon.
Building in an earlier-than-expected margin revival, continued strong rural demand and easing
commodity prices, we raise our FY12F and FY13F EPS 4% and 5%, respectively. The mark to
market of fixed royalty payments for rupee depreciation limits our EPS upgrade. We increase our
dividend payout forecast to 50-55% from 35% to reflect management guidance, leading to an
attractive dividend yield of 3% for FY12F.
Better defensive rural play, we recommend Buy and raise our target price
With split concerns (from Honda) easing and successful brand transformation, the stock has
outperformed impressively (by 21% for past three months). With nearly 45% of sales coming from
rural demand and EBIT margins starting a recovery path after a nearly 40% contraction in the
past seven quarters, we think it offers the best defensive rural play in the Indian basket of stocks.
On our revised EPS, the stock trades at an attractive valuation of 13.8x FY13F with an EPS
CAGR of 22% for FY11-13F. We recommend Buy and raise our DCF-based TP to Rs2,416.5
(from Rs2157.90), at which the stock would trade at 16.1x FY13F.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
2Q recorded a sharp EBIT margin recovery (after a 7-quarter dip) on the back of lower raw
material costs and strong pricing power. Building rupee depreciation, we raise our EPS
forecasts 4-5%. Buy as we believe that HMCL is a better play on strong rural demand and
softening commodity prices, new TP at Rs2416.50
Results deliver on management’s margin-expansion promise
For 2QFY12, Hero Motocorp Ltd (HMCL) achieved significant milestones: a successful brand
change from Hero Honda to Hero Motocorp with significant promotion, historically high sales
volume and reversal of a seven-quarter sliding trend in its EBIT margin. The results surprised
us, with a huge 16% on EBIT and 21% on normalised PAT, driven by a 220bp reduction in
raw material costs as a percentage of net sales, as well as vehicle price hikes (1.5% qoq)
offsetting higher royalty charges towards rupee deprecation. Normalised EPS for the quarter
is Rs33.2, representing growth of 31% yoy and 19% mom adjusted for a Rs600m one-time
brand-change cost.
We raise our EPS forecasts, already higher than consensus, an additional 4-5%
Bloomberg consensus EPS for FY12 was nearly 9% below our forecast (pre-results). Given
better-than-expected results, we believe consensus will catch up with our estimates soon.
Building in an earlier-than-expected margin revival, continued strong rural demand and easing
commodity prices, we raise our FY12F and FY13F EPS 4% and 5%, respectively. The mark to
market of fixed royalty payments for rupee depreciation limits our EPS upgrade. We increase our
dividend payout forecast to 50-55% from 35% to reflect management guidance, leading to an
attractive dividend yield of 3% for FY12F.
Better defensive rural play, we recommend Buy and raise our target price
With split concerns (from Honda) easing and successful brand transformation, the stock has
outperformed impressively (by 21% for past three months). With nearly 45% of sales coming from
rural demand and EBIT margins starting a recovery path after a nearly 40% contraction in the
past seven quarters, we think it offers the best defensive rural play in the Indian basket of stocks.
On our revised EPS, the stock trades at an attractive valuation of 13.8x FY13F with an EPS
CAGR of 22% for FY11-13F. We recommend Buy and raise our DCF-based TP to Rs2,416.5
(from Rs2157.90), at which the stock would trade at 16.1x FY13F.
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