Hero MotoCorp - Q4FY12 Result update - Centrum

Hero MotoCorp Limited's (HMCL) 4QFY12 operating results were below our expectations with EBITDA margins at 15.3% compared to our estimate of 15.7% and consensus estimate of 15.6%. While revenue growth was higher by 0.6% compared to our estimate at Rs.60bn on account of better-than-expected realizations (up 1.2% QoQ vs. est. inc of 0.5%), higher than expected RMC/unit (up 1.6% QoQ vs. est. inc of 0.5%) and higher other expenditure led to lower than expected operating performance despite higher than expected revenues. Adjusted PAT stood at Rs.6.04bn (our est. Rs6.6.48bn). The management expects industry growth to be around 9-10% and believes HMCL will register better than industry growth rate (>10%). We continue to maintain Hold rating on the stock with a target price of Rs.2,262(earlier Rs.2,048) as the stock offers limited upside from current levels.

- Operating results below expectations: HMCL registered 12%/flat YoY/QoQ revenue growth in 4QFY12 to Rs60bn. Net realization for the quarter inched up 1.2% QoQ, better than our expectation of 0.5%, leading to better than expected revenue growth. However, due to higher than expected increase in RMC/unit , EBITDA margins came at 15.3% , lower than our expectation of 15.7% and consensus estimate of 15.6%. Adjusted PAT stood at Rs.6.04bn compared to our estimate of Rs.6.48bn.

- Conference call highlights: 1.) HMCL has declared dividend of Rs.45 for FY12 (dividend yield of 2% at CMP) 2.) The company indicated that inventory levels were normal and retail sales largely mirrored wholesale sales 3.) It will continue to introduce 7-8 new models/variants in FY13E as well 4.) Will increase the scooter segment capacity to 50,000/month - Maestro received encouraging response 5.) Profitable volume growth in exports will take 4-5 quarters as initial brand building, advertising and promotion will eat into profits, and the company is targeting sales of 1mn units by FY16E/FY17E. 6.) Overall annual capacity of two-wheelers to be increased to 7mn units by July/August 2012 from current 6.6mn units annually 7.) It recently hiked prices effective 1st of May 2012 on the 100cc and 125cc segment by Rs.500 and by Rs.1000 on the 150cc segment.

Valuations and Recommendations: At the CMP of Rs2,245, the stock is currently trading at 16.5x FY13E EPS of Rs.136 and 14.8x FY14E EPS of Rs.151. We reiterate Hold rating with a revised target price of Rs2,262 as we rollover our valuations to FY14E (core business valued at 14x FY14E earnings + Rs348 as value of cash and cash equivalents).

Source : Equity Bulls

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