Rating: Buy; Target Price: Rs2,850; CMP: Rs2,348; Upside: 21%
Stays on course; retain Buy
We retain Buy with a TP of Rs2,850. While the company continues to
hold strong franchise in the rural market, we believe that improved
consumer sentiments on the urban side should help it register better
than expected growth. Also, unlike Bajaj Auto, it has a strong
presence in the scooter segment and continues to hold on to its market
share in this fast growing segment. Dealer interaction reveals that
brand franchise of Splendor and Passion models was still strong and
Maestro in the scooter segment was doing well. Further, HMCL indicated
that its ongoing margin transformation program can improve margins by
250-300bps by FY17-18E. Though this may seem a tall claim, it at least
gives us confidence on the sustainability of current margins.
$ Results above expectations: HMCL’s results were largely in line on
the revenue front and above estimates on EBITDA and PAT fronts.
Contrary to our expectation, the management indicated that there was
no impact on account of dealer compensation due to excise cut. As a
result, EBITDA margins for the quarter stood at 13.7% compared to our
est. of 12.8%. Better than expected operating performance, marginally
lower tax rate and higher other income led to 17% beat at PAT level
which stood at Rs5.5bn during the quarter. The company indicated that
it raised prices by Rs300/vehicle effective March 2014.
$ HMCL’s cost saving plans playing out: In 2QFY14, HMCL had announced
that it was looking at annualized savings of Rs15bn by FY17-18E. The
plan seems to be on track with the company achieving savings of
Rs600mn in 4QFY14. Further, it indicated that for April’14, it
achieved savings of Rs250mn through its cost saving program. Cost
saving initiatives covered logistics, raw material consolidation and
e-bidding. Management is targeting to improve margins by 250-300bps by
FY17-FY18E. Though this seems a tall claim, it at least gives us
confidence on the sustainability of current margins.
$ Strong brand franchise helps maintain market share: Dealer
interaction revealed that brand franchise of Splendor and Passion
models continued to be strong (driven by low maintenance and
relatively better re-sale value vs. peers) and Maestro in the scooter
segment was also doing well. This was reflected in the company’s
ability to maintain market share in the domestic motorcycle and
scooter segments at 52% and 19% respectively in FY14.
$ Valuation & Risks: We continue to like HMCL given reasonable
valuations (P/E of 13.2x FY16E), ability to retain its market share
and strong presence in the fast growing scooter segment and rural
markets. We retain Buy with TP of Rs2,850 (based on 16x FY16E EPS).
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.
Thanks & Regards
--
��
Stays on course; retain Buy
We retain Buy with a TP of Rs2,850. While the company continues to
hold strong franchise in the rural market, we believe that improved
consumer sentiments on the urban side should help it register better
than expected growth. Also, unlike Bajaj Auto, it has a strong
presence in the scooter segment and continues to hold on to its market
share in this fast growing segment. Dealer interaction reveals that
brand franchise of Splendor and Passion models was still strong and
Maestro in the scooter segment was doing well. Further, HMCL indicated
that its ongoing margin transformation program can improve margins by
250-300bps by FY17-18E. Though this may seem a tall claim, it at least
gives us confidence on the sustainability of current margins.
$ Results above expectations: HMCL’s results were largely in line on
the revenue front and above estimates on EBITDA and PAT fronts.
Contrary to our expectation, the management indicated that there was
no impact on account of dealer compensation due to excise cut. As a
result, EBITDA margins for the quarter stood at 13.7% compared to our
est. of 12.8%. Better than expected operating performance, marginally
lower tax rate and higher other income led to 17% beat at PAT level
which stood at Rs5.5bn during the quarter. The company indicated that
it raised prices by Rs300/vehicle effective March 2014.
$ HMCL’s cost saving plans playing out: In 2QFY14, HMCL had announced
that it was looking at annualized savings of Rs15bn by FY17-18E. The
plan seems to be on track with the company achieving savings of
Rs600mn in 4QFY14. Further, it indicated that for April’14, it
achieved savings of Rs250mn through its cost saving program. Cost
saving initiatives covered logistics, raw material consolidation and
e-bidding. Management is targeting to improve margins by 250-300bps by
FY17-FY18E. Though this seems a tall claim, it at least gives us
confidence on the sustainability of current margins.
$ Strong brand franchise helps maintain market share: Dealer
interaction revealed that brand franchise of Splendor and Passion
models continued to be strong (driven by low maintenance and
relatively better re-sale value vs. peers) and Maestro in the scooter
segment was also doing well. This was reflected in the company’s
ability to maintain market share in the domestic motorcycle and
scooter segments at 52% and 19% respectively in FY14.
$ Valuation & Risks: We continue to like HMCL given reasonable
valuations (P/E of 13.2x FY16E), ability to retain its market share
and strong presence in the fast growing scooter segment and rural
markets. We retain Buy with TP of Rs2,850 (based on 16x FY16E EPS).
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.
Thanks & Regards
--
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