Hero MotoCorp - Q1FY13 Result Update - Centrum

Hero MotoCorp

Buy

Target Price: Rs2,366

CMP: Rs2,088

Upside: 13%

Operating performance disappoints

Hero MotoCorp Limited’s (HMCL) 1QFY13 operating results were below our expectations with EBITDA margins at 15.0% compared to our estimate of 15.6% largely on account of lower than expected revenue growth. Net realization declined 0.9% QoQ. However, adjusted PAT stood largely in line at Rs.6.15bn compared to our estimate of Rs.6.23bn due to lower tax rate at 16.3% vs. est. 19.5%. The management expects industry growth to be around 9-10% and believes HMCL will register better than industry growth rate (>10%). We continue to maintain Buy rating on the stock with a target price of Rs.2,366.

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m  Operating results below expectations: HMCL registered 9.9%/3.5 YoY/QoQ revenue growth in 1QFY13 to Rs62.5bn. Net realization for the quarter declined by 0.9% QoQ. HMCL had hiked prices in the range of Rs.500-Rs.1000 in May 2012. Lower revenue growth despite savings in RMC resulted in lower than expected operating performance. However, adjusted PAT stood largely in line at Rs.6.15bn compared to our estimate of Rs.6.23bn due to lower tax rate at 16.3% vs. est. 19.5%.

m  Conference call highlights: 1.) The company indicated that inventory levels were higher in 1Q for the industry at about 4 weeks compared to normal levels of 2 weeks. 2.) It pegged contribution from export revenues to overall revenues at 10% over the next 5 years 3.) It planned to re-launch the entire product range in the Premium segment (Hunk and CBZ Xtreme expected during the 2QFY13 4.) It has not encouraged any discounts and neither plans to do so going forward. It indicated that the rational pricing scenario will continue in the 2W space 5.) It planned to maintain dividend payout at 40-45% 6.) It expected tax rate for the year to likely remain in 1QFY13 levels of ~16.5-17% and later inch up to 23-25% in FY14E.

m  Valuations and Recommendations: At the CMP of Rs2,088, the stock is currently trading at 14.9x FY13E EPS of Rs.140 and 13.4x FY14E EPS of Rs.156. We reiterate Buy rating with a revised target price of Rs2,366 (core business valued at Rs2,035 + Rs330 as value of cash and cash equivalents).

Thanks & Regards, 

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