Hero Motocorp - Slowdown impacting volume growth - BRICS Securities

HMCL's results were in line with our estimates. Revenue went up 10% yoy at Rs62.5bn (estimated Rs62.4bn) led by a 7% volume growth and 2% realisation growth. PAT was up 10% yoy, 2% qoq at Rs6.1bn (estimated Rs6.3bn) due to lower raw material and finance costs. The company expects to maintain EBITDA margin of 15% through FY13. Due to rising pressure on the two-wheeler industry, we downgrade volume estimates by 3% and 2%, and earnings estimates by 8% and 4% for FY13 and FY14 respectively. We value HMCL at 16x to arrive at our new target of Rs2,116 (earlier Rs2,304) and maintain our Add rating.

Dominance in entry-level bikes helps growth: Q1 volume grew 7% yoy to 1.64mn and realisation increased 2% (down 1% qoq) to Rs38,042 per vehicle. Dominance in fuel-efficient entry- and executive-bike segments helped it to grow in an otherwise tepid market. Contribution from rural markets is at 45% and exports grew 16% yoy. It had hiked prices in Indiain May, which helped support realisations.

Raw material cost decline, EBITDA margin steady at 15%: A 104bps fall in raw material cost as a % of net sales and lower advertisement expenditure led to an EBITDA of Rs9.4bn (up 1% qoq, down 5% yoy) andmargin of 15%. It expects to maintain this margin level through FY13,though in Q2 (due to planned increase in advertising and marketing expenditure) it may dip to some extent.

PAT up 10% yoy; last year of Haridwar tax exemption: Reported PAT was Rs6.1bn, up 10% yoy (2% qoq) backed by higher volume, steady margin, and lower tax rate. Other income grew 12% yoy to Rs1bn. Taxrate in Q1 was 16.2% and guidance for FY13 is16.5%. The rate will rise in FY14 once tax exemptions at its Haridwar plant reduce to 30% from current 100%.

High interest rates and fuel cost impacting domestic sales: Due to high interest rates and fuel costs over the last year, two-wheeler consumers are opting for more fuel-efficient vehicles within the segment. Entry and executive motorcycle fuel efficiency is generally high compared to premium motorcycles. So players like HMCL (which is dominant in entry and executive), is in an advantageous position. Due to a slowdown in the economy, low consumption in the urban markets, and higher cost of ownership, HMCL is gaining market share. We believe that until consumption in urban markets picks up, it will continue to clock higher sales.

Factoring slowdown in the overall industry Cut volume estimates: Due to rising pressure (due to high cost of ownership) on two wheelers and impact on all players including Hero Motocorp, we cut volume estimates by 3% and 2% for FY13 and FY14 respectively. We estimate 10% and 13% volume growth for FY13 and FY14 respectively. We cut our earnings estimates for FY13 and FY14 by 8% to Rs132 and 4% to Rs162 respectively.

In the current economic environment, HMCL's positioning in entry and executive segment (market share of 75%) puts it ahead of peers. Although two-wheeler industry will continue to face pressures in FY13, we expect Hero Motocorp to outperform the industry as consumers will continue to prefer cheaper and fuel efficient motorcycles.

We believe two-wheeler growth will pickup in FY14 (12%) as penetration level is still low and purchasing power of Indian consumers will continue to rise.

Valuation: We value Hero MotoCorp at 16x to arrive at our new target of Rs2,116(earlier Rs2,304). The stock trades at 16x FY13 and 13x FY14. We see its outperformance to the industry attracting a higher multiple and we maintain our Addrating on the stock.

Source : Equity Bulls

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