Hero MotoCorp:: Centrum

Stays on course, retain Buy
We retain Buy rating on Hero MotoCorp (HMCL) with a TP of Rs2,377. EBITDA margins
continued to remain strong at 14.5% vs. our est. of 14%. It is encouraging to note that,
retail level sales of the company were up 7-8% in 1HFY14 vs. flat numbers for the industry.
It expects to exceed 1.1mn units combined for Oct-Nov’13 implying strong dispatches
during the upcoming festive season. We continue to prefer HMCL over Bajaj Auto given
reasonable valuations, ability to retain its market share and strong presence in the fast
growing scooter segment and rural markets. HMCL has announced it will look at
annualized savings of Rs15bn by FY17-18E with benefits flowing in from 3QFY14 itself.
Though this might seem a tall order, it at least gives us confidence on the sustainability of
current margins.

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Strong brand franchise helps maintain market share: Based on our dealer interaction,
we believe the brand franchise of Splendor and Passion models continue to be strong
(driven by low maintenance and relatively better re-sale value vs. peers) and Maestro in the
scooter segment continues to do well. This is reflected in the company’s ability to largely
maintain its market share in domestic motorcycle and scooter segment at 52% and 20%
respectively in 1HFY14 (53%/19% in FY13). On the other hand, Bajaj Auto has lost 300bps
market share in the overall domestic MC segment in 1HFY14 vs. FY13. HMCL benefited from
stronger rural demand which forms 47% of its sales vs. 40% for the industry.
Cost cutting/export plans too ambitious, but faster progress to pose upside risks:
HMCL has announced it will look at annualized savings of Rs15bn by FY17-18E with
benefits flowing in from 3QFY14 itself (aims at savings of Rs600-800mn in 2HFY14). Cost
saving initiatives included areas like Logistics, raw material consolidation and e-bidding.
On exports front, HMCL plans to enter 8 new markets in 2HFY14 with focus on Africa and
Latin America. It continues to maintain its long term target of achieving 1mn units in
exports in FY17E. Over the next 2 years, HMCL plans to set up new assembly plants in
Columbia and possibly in Brazil. Given the ambitious targets, we keenly watch the progress
on both fronts before building them into our estimates.
Q2FY14 results above expectations: Total income at Rs57.3bn vs. Rs56.5bn, was higher
by 1.3% largely due to better ASPs. Blended ASPs stood at Rs40,433 (up 4% YoY and 2%
QoQ) driven by favourable product mix change. EBITDA margins continued to remain
strong at 14.5% (up 68bps YoY but lower by 32bps QoQ) vs. our est. of 14%. Reported PAT
was Rs4.8bn, higher by 5.3% vs. our est. of Rs4.6bn driven by better than operating
performance and higher than expected other income.
Valuations & Risks: We continue to prefer HMCL over Bajaj Auto given reasonable
valuations (P/E of 14.2x FY15E, 8% discount to BAL), ability to retain its market share and
strong presence in the fast growing scooter segment and rural markets. We maintain Buy
with TP of Rs2,377 (based on 15x Sept 2015). Key downside risks are 1) Failure of new
indigenous products launched by HMCL and 2) Higher than expected success of Discover
models of Bajaj Auto.