Hero MotoCorp - Absence of near-term positive catalysts... - Antique Stock Broking

Hero's 1Q results (PAT at INR6.15bn - up 10% YoY; 2% QoQ) missed our estimate by ~4%, primarily on account of lower other income. Adjusted margins at 10.9% (up 36bps YoY; 10bps QoQ) were broadly in-line with our estimate of 11%. Over the next few quarters, volumes are expected to remain subdued while margins too would trend lower due to adverse currency (total imports @14% of sales) and higher marketing spends (transition from Hero Honda to Hero for all models from next quarter). The same would coincide with a higher than normal capex phase as well. For the stock, besides the superior return ratios and eventual margin uptick in FY15, the only support for the bull was the higher dividend, which is unfortunately no more. Downgrade to HOLD!

1Q Results - Operationally in-line!

- PAT at INR6.15bn (up 10% YoY; 2% QoQ) was 4% below our estimate of INR6.4bn (consensus - INR6.3bn) on the back of lower other income.

- Operationally, the results were in-line. The JPY denominated royalty payment to Honda stood at INR2.2bn this quarter as against INR2.05bn in 4Q. Adjusting for the same, EBITDA margins stood at 10.9% (up 36bps YoY; 10bps QoQ) - broadly in-line with our estimate of 11%.

Margins - Before the eventual uptick (FY15), it will trend lower

- In the near term, we expect margins to trend lower on the back of A) adverse currency impact from direct (5.5% of sales; USD denominated) and indirect (9.5% of sales; JPY denominated) imports; B) higher brand transition spends (full-fledged transition from Hero Honda to Hero for all models from next quarter) and C) Upcoming foray into export markets (which would dilute margins initially).

Channel checks validate what we feared

- We understand from dealers that the brand transition from Hero Honda to Hero hasn't been as smooth as earlier anticipated. In some rural pockets, few dealers mentioned that dropping the Honda badge from the Splendor has impacted conversions by ~5-7% (no impact on the Passion though).

Absence of near-term positive catalysts... Downgrade to HOLD!

- We can't ignore the clear cut margin improvement visible in FY15 (~300bps) simply from royalty savings and hence we continue to give a high weightage to the company's DCF value. However, in the absence of any positive catalyst in the near term, we expect the sluggish volume growth/margins to weigh on the stock performance. Hence we downgrade our reco from BUY to HOLD!

Source : Equity Bulls

Keywords