Hero MotoCorp
Neutral
Target Price: Rs1,780
CMP: Rs1,823
Downside: 2.4%
Operating performance disappoints
Hero MotoCorp Limited’s (HMCL) 3QFY13 operating results were disappointing with EBITDA margins at 12.6% compared to our estimate of 15.0% largely on account of higher than expected RMC to sales and higher other expenditure. While new product launches led to higher RMC QoQ (higher by 140bps), higher marketing and brand building exercise related to new product launches coupled with increase in dealers’ commission from Oct’12 onwards led to higher other expenditure. Consequently, EBITDA margins contracted 128bp QoQ. Lower than expected operating performance led to PAT at Rs4.9bn vs. our estimate of Rs5.9bn. New product launches helped HMCL to increase its overall market share in the domestic motorcycle industry to 52% vs. 49.9% in 2QFY13, while its share in the scooter segment has inched up to 21% vs. 17% in 2QFY13 driven by the success of Maestro. We continue to maintain our Neutral rating on the stock with a target price of Rs.1,780.
m Operating performance disappoints: HMCL registered 3%/19 YoY/QoQ growth in revenue in 3QFY13 to Rs62bn. Average selling price (ASP) for the quarter stood at Rs39,333/unit, up ~Rs412 QoQ largely driven by better product mix. Driven by lower than expected operating performance PAT stood lower at Rs.4.9bn compared to our estimate of Rs.5.9bn and consensus estimate of Rs.6.1bn.
m Conference call highlights: 1.) HMCL increased dealer commission by Rs.100/model effective Oct 1, 2012 (we believe this would have impacted EBITDA margins by 20bps QoQ) 2.) There has been good pick-up in sales in the last 3-4 days post the end of Sankrantri and this trend is expected to continue till Feb’13. 3.) The impact on RMC due to new product launches should normalize in a few quarters 4.) Capacity addition at its Rajasthan plant (investment of Rs5.5bn with capacity of 750k) is on track and will be operational by 2HFY14) taking the total capacity to 7.7mn units. 5.) HMCL has increased capacity at its Haridwar plant from 8,400 units / day to 9,500 units / day. The company is also looking at adding capacity for its Scooter segment 6.) Indirect imports accounted for 9% of its net sales and the management indicated that there was some gain on account of Yen depreciation in 4QFY13.
m Valuations and Recommendations: At the CMP of Rs1,823, the stock is currently trading at 16.3x FY14E EPS of Rs.112 and 12.3 x FY15E EPS of Rs.149. We continue to maintain our Neutral rating on the stock with a target price of Rs.1,780.
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