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

Toying with "bread and butter"

As per some Hero dealers, after the company has dropped the 'Honda' tag from the Splendor Pro & Splendor Plus, conversions have been impacted by ~5% (both these models combined account for around 90% of Splendor and thereby ~35% of total volumes).

This trend is restricted to these two models, as they are the only ones where the parent-brand name (Hero Honda, now Hero) is written on the fuel-tank (in a bigger font), and the sub-brand name (Splendor Pro/Plus) is written below the seat (in a smaller font).

Interestingly, some dealers also cited that in smaller towns, people still commonly refer to Hero bikes as 'Honda ki gaadi' (a Honda bike). We were aware of this phenomenon prevailing much earlier, but assumed that it had diminished substantially over the years.

Sub-brand more important... Honda will take time to develop one!

We highlight that there has been no impact on the Passion and the other models (after the Honda tag has been dropped), as these models continue to the sub-brand tag on the fuel-tank and the parent-brand tag below the seat. This reaffirms the popular belief that the strength of the subbrand matters much more (and hence Hero can correct this situation with the Splendor if/when they wish).

That's also primarily why we aren't as worried about Honda as the street is. In our view, the mere event of "capacity expansion" affects the market dynamics of commodities, not a brand-centric industry like 2Ws. The street seems to have extrapolated the lone success of the Activa brand as Honda's ability to develop strong sub-brands in the motorcycle space (where they have had quite a poor track record thus far).

Margins can only improve... Royalty savings to exceed R&D spends!

Royalty savings (>300bps at this JPY rate) should more than offset R&D and royalty on new models (combined should not exceed 1.5% of sales).

In the near term, the company will also benefit from an appreciating INR given its high import bill, which stands at ~15% of sales (direct - 5.5% of sales, USD denominated; indirect - 9.5% of sales, JPY denominated).

Still can't ignore the high DCF value... Maintain HOLD!

Given the clear cut margin uptick in FY15 (due to royalty savings), we continue to give weightage to the high DCF value. For that reason alone, we maintain our HOLD reco with a target price of INR1,935 {average of INR1,615 (14x FY14 EPS) and INR2,255 (DCF)}.

Source : Equity Bulls

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