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Pricing power back, but will it last?
Hero Motocorp’s (HMCL) 2Q results highlighted the company’s improved
pricing power with a 220 bps QoQ expansion in gross margins, which drove a
19% YoY growth in net profit – 6% ahead of our estimates. With robust
industry growth, no incremental competition and declining commodity prices,
margins could expand further in 2H. Our concern though is on the FY13-14
period when we believe that an aggressive HMSI poses risks to both market
share and margins for HMCL. We upgrade FY12 EPS by 8% but FY13-14 EPS
by only a modest 2-3%. At 15x FY13 P/E, we believe that the near-term
positives are there in the price but the 12m risks are not. We maintain U-PF
with a target price of Rs1925.
Strong 2Q results – 6% above estimates
HMCL reported 2Q EBITDA at Rs9.2bn – up 12% QoQ and 10% above estimates.
While top-line and ASPs were inline with expectations, RM/Sales declined 220 bps
QoQ and drove the EBITDA surprise. Raw material costs declined 1.4% QoQ on a
per vehicle basis as HMCL benefited from lower commodity prices, particularly
base metals. This, together with 1% QoQ higher ASPs due to a small price hike in
end-1Q, led to the drop in RM/Sales. Higher amortization of the fixed royalty
payment to Honda due to Yen appreciation ate into part of the surprise due to
which the net profit beat at 6% was lower than the EBITDA beat of 10%.
Pricing power is back…
With strong industry growth, no incremental competition and stable market share,
HMCL seems to have regained some of its lost pricing power. These conditions are
likely to prevail in 2H and could have the added benefit of lower commodity prices
as well. Gross margins could expand further in 2H as well.
…but will it last?
HMSI is expanding its capacity to 2.8mn units by end-FY12 from 1.6mn in FY11
and further to 4mn units by end-FY13. This is being accompanied by furious
network expansion as well. We anticipate multiple bike launches from HMSI in the
FY13-14 period (most likely in the executive 100cc space) and see risk to HMCL’s
market share and margins beyond FY12.
Near-term positives in the price but 12m risks are not; maintain U-PF
Improved visibility of strong 2H results is likely to boost HMCL’s defensive
credentials in an uncertain market in the near-term. However, valuations at 16.6x
FY12 and 15.0x FY13 P/E don’t leave any room for absolute returns. Investors
having a 3-6m horizon could continue to stay invested in HMCL purely as a
defensive but we would advise 12m horizon investors to stay away at current
levels. We maintain U-PF with a target price of Rs1925
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Pricing power back, but will it last?
Hero Motocorp’s (HMCL) 2Q results highlighted the company’s improved
pricing power with a 220 bps QoQ expansion in gross margins, which drove a
19% YoY growth in net profit – 6% ahead of our estimates. With robust
industry growth, no incremental competition and declining commodity prices,
margins could expand further in 2H. Our concern though is on the FY13-14
period when we believe that an aggressive HMSI poses risks to both market
share and margins for HMCL. We upgrade FY12 EPS by 8% but FY13-14 EPS
by only a modest 2-3%. At 15x FY13 P/E, we believe that the near-term
positives are there in the price but the 12m risks are not. We maintain U-PF
with a target price of Rs1925.
Strong 2Q results – 6% above estimates
HMCL reported 2Q EBITDA at Rs9.2bn – up 12% QoQ and 10% above estimates.
While top-line and ASPs were inline with expectations, RM/Sales declined 220 bps
QoQ and drove the EBITDA surprise. Raw material costs declined 1.4% QoQ on a
per vehicle basis as HMCL benefited from lower commodity prices, particularly
base metals. This, together with 1% QoQ higher ASPs due to a small price hike in
end-1Q, led to the drop in RM/Sales. Higher amortization of the fixed royalty
payment to Honda due to Yen appreciation ate into part of the surprise due to
which the net profit beat at 6% was lower than the EBITDA beat of 10%.
Pricing power is back…
With strong industry growth, no incremental competition and stable market share,
HMCL seems to have regained some of its lost pricing power. These conditions are
likely to prevail in 2H and could have the added benefit of lower commodity prices
as well. Gross margins could expand further in 2H as well.
…but will it last?
HMSI is expanding its capacity to 2.8mn units by end-FY12 from 1.6mn in FY11
and further to 4mn units by end-FY13. This is being accompanied by furious
network expansion as well. We anticipate multiple bike launches from HMSI in the
FY13-14 period (most likely in the executive 100cc space) and see risk to HMCL’s
market share and margins beyond FY12.
Near-term positives in the price but 12m risks are not; maintain U-PF
Improved visibility of strong 2H results is likely to boost HMCL’s defensive
credentials in an uncertain market in the near-term. However, valuations at 16.6x
FY12 and 15.0x FY13 P/E don’t leave any room for absolute returns. Investors
having a 3-6m horizon could continue to stay invested in HMCL purely as a
defensive but we would advise 12m horizon investors to stay away at current
levels. We maintain U-PF with a target price of Rs1925
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