Hero MotoCorp Ltd.|Q2FY15 Concall Update | In line expectation: Cut FY15E/16E EPS by 1.4%/2.3%, reduce target price to Rs.3157 from Rs. 3240 earlier :: IndiaNivesh

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In line expectation: Cut FY15E/16E EPS by 1.4%/2.3%, reduce
target price to Rs.3157 from Rs. 3240 earlier
 Hero MotoCorp reported Q2FY15 net profit jumped by 59% YoY and 36%
QoQ to Rs. 7.63 bn due to higher other income and lower depreciation.
However, Adjusted PAT (after adjusting impact of higher other income) stood
at 7 bn higher than our expectation of Rs. 6.84 bn. Revenue increased by
20% YoY to Rs. 69.9 bn (in line with our expectation of Rs. 69.05 bn) on the
back of strong volume growth.
 Major disappointment came from EBITDA front, EBITDA margin contracted
102 bps YoY to 13.5 % due to higher raw material cost and other expenses.
Other income of the company increased by 72% QoQ to Rs 1.93 bn while
interest expenses increased 66% QoQ. Depreciation decreased by 74% YoY to
Rs. 750 mn. Other income was inflated by Rs 680 mn on account of divestment
of Rs7bn investment to pay out the interim dividend.
 During the half year, the company has implemented Schedule II of the
Companies Act, 2013, and accordingly has computed the depreciation as
prescribed by the Act or actual useful life of assets, whichever is lower the
carrying value of the assets which has completed its depreciation period as
on April 1, 2014 has been adjusted to the General Reserve. The remaining
assets have been depreciated over the remaining useful life has been
recognized as charge in the statement of Profit and Loss for the half year
ended September 30, 2014.
Conference call highlights
 In the results call, the management noted that volume growth is likely to be
around 1213% in FY15E, with H2FY15E also likely to register doubledigit
growth.
 With excise duty cut being passed on to all products across plants. Hero
Motocorp incurred a cost of Rs1,340/vehicle, thereby, impacting profitability
at Haridwar (inputs attract excise duty, whereas, finished goods out of
Haridwar are exciseexempt). Impact of the same was Rs 950 mn as Hardwar
accounts for ~40% of the volumes, which is likely to recur over the next
few quarters.
 Management guided for a 200bps improvement in margins over the next
couple of years driven by reversal of the anomaly in excise differential in input
vs output which could add ~130 bps to margins and significant progress made
in the intensive cost reduction exercise.
 The company received an order of 45,000 units for the export market, mainly
from Sri Lanka,.
 Scooter segment capacity is likely to be increased from 75000 units/month
to 100,000 units/month by Jan’15.
 Export guidance stands at 240,000 units in FY15E.
Revised Estimates: Cut FY15E/16E EPS by 1.4%/2.3%
We are tweaking our numbers marginally for FY15E/FY16E EPS by 1.4%/2.3% led by
cut in EBITDA margins on higher RM cost pressures and other expenses offset by
lower depreciation charge as per revision in assets value and gains in volume. Margin
loss is being made up by volume gains hence not much impact. We believe given
the strong product portfolio and the initial success of Splendor ‘iSmart’, HMCL could
surprise positively on the volume front. We increase our volume assumption by
2.4% in FY15 and 3.9% in FY16E. Thus we revised our target price from Rs 3240 to
Rs. 3157 (based on 18xFY16E).

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