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The management has maintained optimism over domestic demand,
expecting the industry to grow in early teens in FY13. In our view, weak
sentiments are likely to drag down motorcycle demand and Hero runs the
risk of missing its guidance. Sluggish demand should keep promotion
costs high. Margin lever exists only in the form of a fall in commodity
prices, a benefit which could accrue only from Q1FY13. We lower our
FY12E and FY13E EPS by 4% and 11% respectively to factor in weak
domestic motorcycle demand and margin disappointment. Accordingly,
we lower our TP to INR1,870, implying 14xFY13 EPS of INR132. Strong
balance sheet and dividend yield of 5% are likely to support the stock on
the downside while lack of a positive trigger and rich valuations should
cap the upside. Maintain ‘Hold’.
Too much optimism on domestic demand
Management expects 12%‐13% growth in Q4FY12 and around 12% growth FY13 for the
industry. Given the weak consumer sentiments and a sharp slowdown in the economy,
achieving this is going to be a challenging task. We have highlighted this in our report
Edel Pulse ‐ On a tough terrain dated Jan 2012. We expect Hero to grow by 7% in FY13.
Limited margin levers left
Despite a ramp up at the tax free Haridwar plant and lower promotion spend, EBITDA
margins were lower by 20bps QoQ, indicating that the company specific margin levers
are far and few. As demand slows down, promotion cost is likely to go up. The benefit
of lower raw material costs could accrue from FY13 provided INR does not depreciate
further.
Outlook and valuation: Limited vroom; Hold
Slowing demand has deteriorated the outlook. However, dividend yield of 5% limits the
downside. We lower our FY13 sales expectations by 4% and EBITDA margins by 120
bps. Accordingly, we lower our FY13E EPS by 11% to INR132 (3% below consensus) and
our target price to INR1,870 (from INR2,130). Our target price implies one year forward
PE multiple of 14x (the last seven year average). Key upside risks include a strong
winter crop reviving the rural demand while the key downside risk is the intense
competition from Honda.
Key takeaways from the earnings conference call
Domestic market
a) The management is not experiencing any slowdown in per capita earnings in rural areas.
b) They expect vehicle sales growth from rural areas to remain ahead of urban areas.
c) Company is entering into many tie‐ups in rural areas with local co‐operatives and
grameen banks.
d) Retail sales are looking up in January 2012 though need to see if the trend sustains.
e) Management expects double digit growth for FY13 for the industry (Vs 5%‐6% expected
by Bajaj Auto)
f) All plants are working at full capacity. At this rate, the company should meet 15%
volume growth in FY13.
Exports markets
a) Company is getting aggressive on its entry into newer export markets (like SEA) in next
2‐3 quarters.
b) It is also open for any kind of local tie‐up/acquisition for faster growth.
c) Company targets to sell over 1mn vehicles annually in 5‐6 years.
d) Currently, the company is exporting vehicles to South Asia and LATAM markets where
Hero is growing by 21%.
Capacity addition
a) Company expects the production capacity to increase to 7mn units by end of Mar’12
from 6.2mn currently.
b) The capacity of Haridwar plant is expected to increase to 9500units/day by mid‐FY13
from 8000/day now.
c) It is also considering setting a new plant on which information will be divulged very
soon.
Other highlights
a) Inventory situation at dealers end is at 2.5 weeks (Vs 1‐1.5 wk norm).
b) Company could not take benefit of softening raw material prices due to weak INR. The
management does not expect the benefit coming in Q4FY12 unless there is a sharp
movement.
c) Sales volume decelerated in December though Hero maintained its momentum. It also
expects the industry growth to remain healthy at 12%‐13% in Q4FY12.
d) Tax rate to remain at the same level in Q4FY12 compared to Q3FY12.
e) Wage cost had gone up in the quarter due to wage agreement in Aug’11.
f) Royalty amortization for the quarter was at INR2280mn.
g) Company is adding 500 touch points every year and targets network to increase to 5000
by end of FY12.
h) Ad expenses to remain high compared to industry.
We lower our FY12/FY13 earnings estimates by 4%/11%; introduce
FY14E financials
We have lowered our FY13 volume estimates by 4% as we expect growth in FY13 to be
weaker than FY12. Sluggish demand implies an increase in promotion costs as seen from the
management philosophy that higher ads mean higher sales. As a result, the EBITDA margin
has been revised downward by 122bps. Our FY12 volume estimates remain the same
though the EBITDA margin declines by 45bps. We cut our FY12/13 EPS estimates by 4%/11%
respectively. Our FY13E EPS is 3% below consensus.
We also introduce our FY14 financial forecast with a 10.4% YoY increase in volume and 4.6%
YoY increase in EPS at INR138. Volume growth is driven by a revival in domestic demand and
a pick‐up in exports while deteriorating product mix is likely to be a drag on margins.
Increase in effective tax rate, as the tax benefit from tax free Haridwar plant fades away,
should be additional drag on EPS growth.
Outlook and valuations
Slowing demand has deteriorated the outlook. However, dividend yield of 5% limits the
downside. We lower our FY13 sales expectations by 4% and EBITDA margins by 120 bps and
accordingly lower our FY13EPS by 11% to INR132 (3% below consensus). We lower our
target price to INR1,870 from INR2,130. Our target price implies one year forward PE
multiple of 14x (the last seven year average).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The management has maintained optimism over domestic demand,
expecting the industry to grow in early teens in FY13. In our view, weak
sentiments are likely to drag down motorcycle demand and Hero runs the
risk of missing its guidance. Sluggish demand should keep promotion
costs high. Margin lever exists only in the form of a fall in commodity
prices, a benefit which could accrue only from Q1FY13. We lower our
FY12E and FY13E EPS by 4% and 11% respectively to factor in weak
domestic motorcycle demand and margin disappointment. Accordingly,
we lower our TP to INR1,870, implying 14xFY13 EPS of INR132. Strong
balance sheet and dividend yield of 5% are likely to support the stock on
the downside while lack of a positive trigger and rich valuations should
cap the upside. Maintain ‘Hold’.
Too much optimism on domestic demand
Management expects 12%‐13% growth in Q4FY12 and around 12% growth FY13 for the
industry. Given the weak consumer sentiments and a sharp slowdown in the economy,
achieving this is going to be a challenging task. We have highlighted this in our report
Edel Pulse ‐ On a tough terrain dated Jan 2012. We expect Hero to grow by 7% in FY13.
Limited margin levers left
Despite a ramp up at the tax free Haridwar plant and lower promotion spend, EBITDA
margins were lower by 20bps QoQ, indicating that the company specific margin levers
are far and few. As demand slows down, promotion cost is likely to go up. The benefit
of lower raw material costs could accrue from FY13 provided INR does not depreciate
further.
Outlook and valuation: Limited vroom; Hold
Slowing demand has deteriorated the outlook. However, dividend yield of 5% limits the
downside. We lower our FY13 sales expectations by 4% and EBITDA margins by 120
bps. Accordingly, we lower our FY13E EPS by 11% to INR132 (3% below consensus) and
our target price to INR1,870 (from INR2,130). Our target price implies one year forward
PE multiple of 14x (the last seven year average). Key upside risks include a strong
winter crop reviving the rural demand while the key downside risk is the intense
competition from Honda.
Key takeaways from the earnings conference call
Domestic market
a) The management is not experiencing any slowdown in per capita earnings in rural areas.
b) They expect vehicle sales growth from rural areas to remain ahead of urban areas.
c) Company is entering into many tie‐ups in rural areas with local co‐operatives and
grameen banks.
d) Retail sales are looking up in January 2012 though need to see if the trend sustains.
e) Management expects double digit growth for FY13 for the industry (Vs 5%‐6% expected
by Bajaj Auto)
f) All plants are working at full capacity. At this rate, the company should meet 15%
volume growth in FY13.
Exports markets
a) Company is getting aggressive on its entry into newer export markets (like SEA) in next
2‐3 quarters.
b) It is also open for any kind of local tie‐up/acquisition for faster growth.
c) Company targets to sell over 1mn vehicles annually in 5‐6 years.
d) Currently, the company is exporting vehicles to South Asia and LATAM markets where
Hero is growing by 21%.
Capacity addition
a) Company expects the production capacity to increase to 7mn units by end of Mar’12
from 6.2mn currently.
b) The capacity of Haridwar plant is expected to increase to 9500units/day by mid‐FY13
from 8000/day now.
c) It is also considering setting a new plant on which information will be divulged very
soon.
Other highlights
a) Inventory situation at dealers end is at 2.5 weeks (Vs 1‐1.5 wk norm).
b) Company could not take benefit of softening raw material prices due to weak INR. The
management does not expect the benefit coming in Q4FY12 unless there is a sharp
movement.
c) Sales volume decelerated in December though Hero maintained its momentum. It also
expects the industry growth to remain healthy at 12%‐13% in Q4FY12.
d) Tax rate to remain at the same level in Q4FY12 compared to Q3FY12.
e) Wage cost had gone up in the quarter due to wage agreement in Aug’11.
f) Royalty amortization for the quarter was at INR2280mn.
g) Company is adding 500 touch points every year and targets network to increase to 5000
by end of FY12.
h) Ad expenses to remain high compared to industry.
We lower our FY12/FY13 earnings estimates by 4%/11%; introduce
FY14E financials
We have lowered our FY13 volume estimates by 4% as we expect growth in FY13 to be
weaker than FY12. Sluggish demand implies an increase in promotion costs as seen from the
management philosophy that higher ads mean higher sales. As a result, the EBITDA margin
has been revised downward by 122bps. Our FY12 volume estimates remain the same
though the EBITDA margin declines by 45bps. We cut our FY12/13 EPS estimates by 4%/11%
respectively. Our FY13E EPS is 3% below consensus.
We also introduce our FY14 financial forecast with a 10.4% YoY increase in volume and 4.6%
YoY increase in EPS at INR138. Volume growth is driven by a revival in domestic demand and
a pick‐up in exports while deteriorating product mix is likely to be a drag on margins.
Increase in effective tax rate, as the tax benefit from tax free Haridwar plant fades away,
should be additional drag on EPS growth.
Outlook and valuations
Slowing demand has deteriorated the outlook. However, dividend yield of 5% limits the
downside. We lower our FY13 sales expectations by 4% and EBITDA margins by 120 bps and
accordingly lower our FY13EPS by 11% to INR132 (3% below consensus). We lower our
target price to INR1,870 from INR2,130. Our target price implies one year forward PE
multiple of 14x (the last seven year average).
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