Hero MotoCorp - Operating performance beats estimates - Centrum

Hero MotoCorp Limited's (HMCL) 2QFY13 operating results were better than our expectations with EBITDA margins at 13.9% compared to our estimate of 13.2% largely on account of better than expected revenue growth. Net realization increased 2.3% QoQ against our expectation of 1%. Driven by better than expected operating performance, adjusted PAT stood at Rs4.4bn compared to our estimate of Rs.4bn. The management expects industry growth to be around 5-6% in FY13E and believes HMCL's growth will be in line with industry rates. We are downgrading the stock from Buy to Neutral with a revised target price of Rs.1,865, to factor in the cut in earnings estimates for FY13E and FY14E.

Operating results better than expected: HMCL registered 11%/17 YoY/QoQ drop in revenue in 2QFY13 to Rs52bn. Average selling price (ASP) for the quarter stood at Rs.38,921/unit , up ~Rs900 QoQ. Increase in realization was on account of 1.) Higher contribution from Splendor 125cc within the Splendor family (Ex-showroom price of Splendor 125cc was Rs.59.81k, and that of Splendor 97cc Rs.50.2k-Rs.52.38k), 2.) Higher contribution from Maestro (Rs.56.89k) compared to Pleasure at Rs.50.66k) 3.) Higher contribution from spare part sales. Resultant, driven by better than expected operating performance, adjusted PAT stood at Rs4.4bn compared to our estimate of Rs.4bn.

Conference call highlights: 1.) While the company did not increase prices in 2Q, it raised it marginally by Rs.300 across models effective 1st of October 2012. Currently there are no plans to offer any freebies or discounts. Marketing spend at 2% of net sales has been retained. 2.) Overall scooter sales for September 2012 stood at 50k, of which, Maestro did 20k units and pleasure 30k. Given the higher demand for Maestro, the company is increasing its current capacity of scooters to 60k units/month. 3.) Management indicated flattish to marginally positive response to the festive season so far. It indicated that per day dispatch which stood at 10,000 units till 15th of October'12, saw an increase to 25,000/day during festive (navratri) period 4.) Capex guidance for FY13E was at Rs.5.5-6bn. 5.) Overall Export target will be maintained at 1mn units for the next 5 years.

Valuations and Recommendations: At the CMP of Rs1,795, the stock is currently trading at 16.1x FY13E EPS of Rs.112 and 13.8x FY14E EPS of Rs.130. We are downgrading the stock from Buy to Neutral with a revised target price of Rs.1,865, to factor in the cut in earnings estimates for FY13E and FY14E.

Source : Equity Bulls

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