Hero Motocorp - In line result, Maintain Neutral - Sunidhi

Reported PAT at Rs.4.40bn - against estimates of Rs.4.25bn

HMCL reported Q2FY13 results broadly in line with estimates. Revenue declined by 11% YoY to Rs.51.9bn (v/s expectation of Rs.50.9bn) due to 13.7% decline in volumes. Although 15% increase in revenue from high margin spare parts segment to Rs.c4bn cushioned the fall to some extent in overall revenue. EBIDTA declined by 21.6% to Rs.7.19bn (v/s expectation of Rs.7.14 bn). EBIDTA margin contracted by 180 bps YoY to 13.9% (against expectation of14%). PAT declined by 27.0% YoY to Rs.4.40 bn (against expectation of Rs.4.25 bn). Going forward management expects healthy volume uptick during festive season, however indicated for a 5-6% growth in two wheeler industry in FY13 (against earlier expectation of 10% growth).

Passion xPro will be available in the market before Diwali

The competition is expected to rise further as BAL is expected to launch one new motorcycle in 100cc segment in coming months. Further HMCL has also started dispatching its new motorcycle - Passion xPro, which will be available in the market before Diwali. Although we do not expect HMCL to loose its leadership position in near term, we believe that rising competition and high base effect will limit its volume growth (unless it will expand its addressable market and attain success in export market. Currently export contributes 2-3% to the total HMCL volumes).It is to be noted that HMCL has lost 263 bps YoY market share during Sep Ytd FY13 on account of lower dispatch due to higher inventory in the system and intensified competition in the 2 wheeler segment.

Maintain Neutral rating on the stock with target price of Rs.1894

We continue to remain Neutral on HMCL on account of rising competition in the domestic market, lack of visibility of growth in export volumes (or addressable market) and high base effect for volume growth coupled with higher dependence of profitability on volumes. Although festive season is expected to be healthy for HMCL, visibility for sustainable volume growth is still some time away. We revised our earnings estimates downward by 4.9%/9.6% to Rs.116/Rs.126.3 for FY13E/FY14E. Post revision in our earnings estimates we reduced our target price to Rs.1894 (from 2,096). At our target price stock would trade at 16.3xFY13E and 15xFY14E EPS.

Source : Equity Bulls

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