Hero MotoCorp - 2QFY2013 Result Update - Angel Broking

Hero MotoCorp (HMCL) reported marginally lower-than-expected results for 2QFY2013 led by a sharp deterioration in operating margins which declined 230bp yoy (158bp qoq) to 9.9%. The poor performance during the quarter can be attributed to slowdown in demand, increasing competition and inventory pile-up at the dealer end. While the current inventory stands at around six weeks, the management expects the inventory to reach normal levels of three-four weeks post the festival season which is expected to witness pick-up in demand. We revise our volume estimates downwards to factor in weak demand environment and also lower our operating margin estimates to account for the poor performance during the quarter. We maintain our Accumulate rating on the stock.

Marginally lower-than-expected 2QFY2013 results: HMCL's top-line during the quarter registered a decline of 11% yoy (17% qoq) to Rs.5,187cr which was on the expected lines considering that the volumes had declined 13.7% yoy (18.7% qoq) due to slowdown in demand and build-up in dealer inventory. The net average realization however, increased 3.2% yoy (2.1% qoq) benefitting primarily from a strong growth (~15% yoy) in the spare parts revenue. On the operating front, the EBITDA margins (adjusted for change in accounting for royalty payments) declined 230bp yoy (158bp qoq) to 9.9% largely due to lower operating leverage benefits (due to production cuts) and higher employee expenses. However, higher spare parts revenue and savings on the royalty amortization cost supported margins to a certain extent. Nonetheless, due to a weak operating performance, the net profit registered a decline of 27% yoy (28.4% qoq) to Rs.441cr, marginally lower than our estimate of Rs.462cr.

Outlook and valuation: At Rs.1,796, the stock is trading at 13.8x FY2014E earnings. We believe that a gradual pick-up in retail demand, new model launches in FY2014E and localization benefits will enable the company to clock a healthy CAGR of ~10% in net profit over FY2012-14E. We maintain our Accumulate rating on the stock with a revised target price of Rs.1,956.

Source : Equity Bulls

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