Hero MotoCorp - Can festivities save Hero from its blushes? - ICICIdirect

Hero MotoCorp Ltd (HMCL) reported its Q2FY13 numbers, which were slightly above our estimates. The topline growth has been largely due to better realizations due to higher sales of 125cc bikes, higher spares income and pick-up in scooter volumes. We are concerned about the significant increase in receivables (185% over FY12), due to rising dealer inventories. There is a risk of further production cuts in case the management optimism and dependence on the coming festive season is misplaced. Despite the management guidance of 4-5% growth for FY13E, we differ on the same and have taken a ~3% decline instead. We estimate HMCL would be facing low CAGR earnings growth of ~1% (FY12-14E). Till the time more clarity emerges over the export capability, we remain cautious and maintain our HOLD rating on the stock.

Overall decline expected...margin decline not as severe as anticipated!!

HMCL has witnessed a significant de-growth (16%) in the motorcycle segment which declined by 3% in this quarter. The decline in topline was expected. However, the operating margins have been better than our estimates owing to improved sales of spare parts (15% YoY increase).

Industry in a cyclical downturn, high competitive intensity adds to woes...

The domestic two-wheeler market is in cyclical downturn in both urban and rural markets. High fuel prices, sticky interest rates continue to hurt demand. Competitive intensity has increased in the motorcycle space with HMSI clearly gaining market share. The growing scooter segment remains the only positive, with HMCL gaining market share. We believe the export markets can help revive HMCL's fortunes. However, it remains to be seen how fast HMCL moves on this front.

Stock price has significantly corrected...mimics poor outlook!!

Despite falling ~20% from its peak in this year, we believe the valuations are at best fair. The outlook remains bleak in view of increasing competitive intensity and subdued demand outlook. At 14.0x FY14E EPS, we arrive at a target price of Rs.1712. We continue to maintain HOLD recommendation on the stock, but with a down side of 5%.

Source : Equity Bulls

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