Hero Motocorp - HIPL & HMC to merge, capex plans outlined; we retain a Sell - Anand Rathi

Hero Motocorp's Board has approved merging Hero Investments Pvt. Ltd. (HIPL) with Hero Motocorp (HMC). The merger allows private equity investors in the erstwhile Hero Investments a direct exit through secondary markets. Management also intends to invest Rs.25.8bn to set up two plants, to be completed in FY14. On fair valuations, we retain a Sell on HMC, with a target of Rs.2,087. It trades at 13.2x FY13e.

Merger approved. The Board of Hero MotoCorp has approved merging HIPL, the investment arm of the Hero Group, with HMC. This would not have any impact on the non-HIPL shareholders of HMC.

Private equity investors offered an exit. The merger will allow private equity investors in the erstwhile Hero Investments a direct exit through secondary markets. Significantly, the merger would reduce promoter shareholding, by 12.3%, to 39.9% (see page 2). Lathe Investments P.L. (GIC) and BC India Pvt. Investors (Bain Capital) will now hold 3.7% and 8.6% respectively in HMC, and be classified as non-promoter entities.

Aggressive capex plans. Management also intends to invest Rs.25.8bn to set up two plants, one in Gujarat at a cost of Rs.11bn, the other in Rajasthan at Rs.4bn, in addition to Rs.4bn for an R&D facility at Rajasthan. The plants would be completed by 2QFY14, raising capacity to 9m units. In exports, HMC plans to export to Central America and Africa by end - 2QFY13. It expects exports to grow ~25% this year, and is looking at overseas assembling of vehicles in the next few quarters.

Valuation. While the capacity expansion and export plans are aggressive, and positive, the benefits are likely to be seen only after 15-18 months. In the interim, volume pressure due to competition and the rupee depreciation would be cause for concern. We maintain a Sell, with a target of Rs.2,087. The stock trades at 13.2x FY13e. Risks: rupee appreciation reducing royalty outflow, better-than-expected volumes.

Source : Equity Bulls

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