Targets LEAP into higher margin orbit… • Hero MotoCorp :: ICICI Securities, PDF link

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Targets LEAP into higher margin orbit…
• Hero MotoCorp (HMCL) reported revenues of | 6915 crore vs. our
estimate of | 6997 crore (YoY increase of ~21%) with overall
volumes growing ~19% YoY
• EBITDA margins came in at 13.5% (flat QoQ but down ~100 bps
YoY), higher than our estimates as the performance of its >125 cc
segment has been largely deteriorating over the past year
• PAT at ~| 763 crore was boosted by higher-than-expected other
income and came in higher than our estimate of ~| 694 crore
LEAP, end of royalty regime to push up margins, profitability!
HMCL has been proactive to enhance profitability and launched project
LEAP, a mass-scale exercise to focus on cost control by way of 1) price
rationalisation of products, 2) raw material consolidation through vendor
rationalisation and 3) savings in outbound logistics costs. LEAP has
started on a positive note with the management saying gross annual
savings will touch ~| 450 crore in FY15E. Going ahead, the management
has said it aims to reach ~17% operating margins in the next three years.
We believe the management focus on profitable growth augurs well for
HMCL, especially with the heavy global capex lined up in the next three or
four years. Also, with the end of royalty payouts to Honda, profitability is
expected to improve (~| 800 crore royalty paid annually).
Likely to have weathered initial onslaught from HMSI
HMCL has had a glorious past piggybacking on flagship brands like
“Splendor/Passion”. However, the key challenge would be protecting the
market share in the motorcycle segment even as the legacy “Splendor”
family line faces competition from new product launches in the “Yuga”
and “Discover” series. As competition continues to remain elevated with
HMSI, BAL and TVS continuing to launch new products, HMCL’s ability to
protect market share with new product launches would remain a key
monitorable. However, HMCL seems to have weathered the initial storm
from HMSI in the motorcycle segment as illustrated in H1FY15.
Capex programme well-timed as economy on brink of recovery
With expectations of a revival in the economy, HMCL’s capacity
expansion programme seems to be perfectly timed to benefit from the
economic recovery. The new capacity will also aid scooter volumes,
which are clearly struggling with capacity constraints. The scooter
segment is likely to constitute ~30% of the total 2-W industry sales in the
next two years, auguring well for HMCL as it commands ~16% market
share. HMCL has lined up a strong global capex programme in the next
three or four years with a view to becoming a major global two-wheeler
manufacturer. The management has reiterated its ambitious export aim,
which is to reach 1.2 million units by 2020 from ~1.3 lakh units in FY14.
Strong business profile; market share sustenance to remain key!
HMCL’s business profile remains attractive with robust financials vis-à-vis
return ratios and balance sheet strength coupled with a market leadership
profile. Also, strong plans for product launches and cost rationalisation
augur well for the company. On the topline front, HMCL’s revenue is
expected to grow at ~13% CAGR over FY14–16E, driven by ~11%
volume growth with earnings rising ~28% over the same period. We
value HMCL at 14x FY17E EPS (in line with Bajaj Auto) to arrive at a target
price of | 3078. We would, however, wait for the market share to sustain
before upgrading our recommendation. We recommend HOLD.

LINK
http://content.icicidirect.com/mailimages/IDirect_Hero_MotoCorp_Q2FY15.pdf