Hero MotoCorp - HDFC Securities

HMCL reported better decent numbers for Q3FY13 on the account of improved scooter and executive motorcycle segment sales. The management expects to do even better in the Q4FY13, although the industry outlook remains subdued. Increasing competition from Honda coupled with rising inventory levels at the dealers end (indicated by rising receivables) indicates a competitive scenario making the environment difficult for the listed players.

HMCL's main competitor in the domestic two-wheeler market Bajaj Auto has posted better results with a 3% jump in profits on the back of better product mix and strong volume growth. HMCL has also aired positive outlook for the future saying that consumer sentiments have improved and it expects a better sales in the ongoing fourth quarter. It has already announced construction of its fourth manufacturing plant and a new Global Parts Centre (GPC) at Neemrana in Rajasthan.

The last two quarters have been challenging for the Indian auto industry on account of the delayed monsoons, rising fuel prices and subdued sentiments. Labour troubles for HMCL are worsening as workers are now planning to go slow on production beginning today. The workers have been protesting against the low wage hike suggested by the company. The talks on wages between the management and workers at Gurgaon plant failed on Jan 22. The workers have been demanding Rs.15,000 -18,000 monthly hike in wages while the management is willing to give only Rs 7,000 hike in wages per month. According to the management, the company will continue to engage with the workers amicably on the wage issue. However, it can't be coerced into decisions governed by external pressure tactics.

HMCL is planning to ramp up its export turnover from high-growth markets of Africa and Latin America, over the medium term. The management highlighted strong competition from existing players in those overseas markets, and this could put pressure on its overall operating margins, going forward.

HMCL has the largest sales and service network with the nearest competition being 60% in network size. Its balance sheet is clean, has scope for leverage if necessary, generates enough cashflow and has two of the best known brands - Splendour and Passion. Further selling motorcycles is more an exercise in brand building. Technology is not too complex and there are many examples of Indian companies having built class-leading products on their own. However off late the competition in the industry has intensified and newer capacities are coming on stream. Given the sluggish growth in demand, margins could remain under pressure.

We are revising our FY13 estimates downwards given the weak 9MFY13 performance and are introducing FY14 estimates. At the CMP of Rs.1779.2, the stock is trading at 17.4x FY13RE EPS of Rs.101.9 and 16x FY14E EPS of Rs.110.5.

In our Q2FY13 result update dated October 31, 2012, we had stated that the stock could be exited between the then CMP of Rs.1,871.9 and Rs.1,938 and re-entered in the Rs.1,596-1,653 band. Post the issue of the report, the stock made a high of Rs.1,963 on November 5, 2012 and a low of Rs.1,720 on January 18, 2013.

HMCL delivered a poor performance in Q3FY13 and this has been reflected through the ~14% correction over the last month. We feel that the stock could be exited between the CMP and Rs.1823 (16.5xFY14E EPS) and re-entered on dips to in the trade in a range of Rs.1,547-1,602 band (14.0-14.5x FY14E EPS) over the next quarter.

Source : Equity Bulls

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