HMCL’s reported 1Q PAT at Rs.5.5B (-11% y/y) was below our
estimates. While the EBITDA margin (+100bp q/q) surprised, as the
other expenditure cost ratio declined -100bp q/q, tax rate increased
sharply to 26.9% (as the exemptions from the Uttarakhand plant have
partially expired). Our view: We re-iterate our UW stance on Hero
Motocorp given that: i) industry growth outlook remains weak, ii)
scooters are gradually expanding in the product mix, and iii) competition
is intensifying across segments.
Conference call takeaways: Demand outlook: Management continues
to guide for an uncertain demand environment and expects single digit
growth over FY14E (while they had initially guided to 7-8% growth in
the year, the sharp decline in sales over 1Q has surprised negatively).
During the quarter, realizations declined by -2% q/q due to lower sales
of premium bikes, given the ongoing slowdown. The OEM will launch
new variants during the festive season, which will likely drive sales over
2H. On exports, while the management is targeting sales of 300,000
units in FY14E, given the decline in industry exports over 1Q, they
highlighted that the demand environment is uncertain. Margins: The
OEM took a price hike of Rs.1,000 in April, which aided margins.
However, as the OEM imports components from overseas, the impact of
the weaker INR will impact over 2Q. Tax Rates: The benefits from the
Uttarakhand plant have partially expired and management expects tax
rates to sustain at current rates of ~27%.
Price Target: While our estimates are largely unchanged, we are rolling
forward our PT timeframe to Dec'13 and set a revised PT of Rs.1,620,
based on 12.5x PE multiple (in line with our earlier methodology). Key
upside risks: a recovery in industry sales, robust growth in exports at
Hero Motocorp.
��
estimates. While the EBITDA margin (+100bp q/q) surprised, as the
other expenditure cost ratio declined -100bp q/q, tax rate increased
sharply to 26.9% (as the exemptions from the Uttarakhand plant have
partially expired). Our view: We re-iterate our UW stance on Hero
Motocorp given that: i) industry growth outlook remains weak, ii)
scooters are gradually expanding in the product mix, and iii) competition
is intensifying across segments.
Conference call takeaways: Demand outlook: Management continues
to guide for an uncertain demand environment and expects single digit
growth over FY14E (while they had initially guided to 7-8% growth in
the year, the sharp decline in sales over 1Q has surprised negatively).
During the quarter, realizations declined by -2% q/q due to lower sales
of premium bikes, given the ongoing slowdown. The OEM will launch
new variants during the festive season, which will likely drive sales over
2H. On exports, while the management is targeting sales of 300,000
units in FY14E, given the decline in industry exports over 1Q, they
highlighted that the demand environment is uncertain. Margins: The
OEM took a price hike of Rs.1,000 in April, which aided margins.
However, as the OEM imports components from overseas, the impact of
the weaker INR will impact over 2Q. Tax Rates: The benefits from the
Uttarakhand plant have partially expired and management expects tax
rates to sustain at current rates of ~27%.
Price Target: While our estimates are largely unchanged, we are rolling
forward our PT timeframe to Dec'13 and set a revised PT of Rs.1,620,
based on 12.5x PE multiple (in line with our earlier methodology). Key
upside risks: a recovery in industry sales, robust growth in exports at
Hero Motocorp.
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