Hero MotoCorp - 4QFY2013 Result Update - Angel Broking

Hero MotoCorp (HMCL) reported better-than-expected results for 4QFY2013 driven by sequential improvement in operating margins (up 124bp) to 13.8%. The margin improvement was largely on account of easing commodity cost pressures, supported further by depreciation of the Yen, which led to significant savings on the raw-material front. While volume growth is expected to remain modest (~6% volume CAGR over FY2013-15) due to increasing competition, we expect profitability to improve gradually over the next few quarters driven by the recent pricing action (price hikes of Rs. 500-Rs. 1,500 in April 2013) coupled with continuous depreciation of Yen (in addition to royalty, indirect imports account for ~9.5% of net sales, half of which are JPY denominated). The profitability is set to further improve sharply, once the royalty costs are paid out completely in 1QFY2015. We broadly retain our revenue and earnings estimates for FY2014/15. We maintain our Accumulate rating on the stock.

Operating performance surprises positively: For 4QFY2013, HMCL's top-line recorded a modest growth of 1.8% yoy (down 0.7% qoq) to Rs. 6,146cr driven by 4.8% yoy (1.7% qoq) growth in net average realization on the back of favorable product-mix. The volume performance however was subdued (down ~3% yoy and qoq), owing to slowdown in demand and increasing competition from Honda Motors and Scooters India. The operating performance witnessed a sharp improvement sequentially as margins expanded 124bp qoq, largely due to the softening of raw-material prices coupled with depreciation of the Yen, which resulted in a 190bp savings on the raw-material front. Led by a strong operating performance, the bottom-line registered a robust growth of 17.7% qoq to Rs. 574cr, which was ahead of our expectations of Rs. 492cr. On a yoy basis though, the net profit declined 4.9% on account of a 150bp decline in operating margin following higher marketing spends and increase in power and transportations costs.

Outlook and valuation: At Rs. 1,649, the stock is trading at 11.8x FY2015E earnings. We maintain our Accumulate rating on the stock with a target price of Rs. 1,819, valuing the stock at 13x FY2015 earnings (at a discount of ~15% to Bajaj Auto's multiple of 15x).

Source : Equity Bulls

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