Hero MotoCorp - Operating performance beats, maintain Buy - Centrum

Hero MotoCorp Limited's (HMCL) 4QFY13 operating results were better than our expectations with EBITDA margins at 13.8% compared to our estimate of 13.0% largely on account of better than expected net realizations (net realization improved 2.3% QoQ vs. our est. of flat realization growth). Driven by better realization, weaker Yen (benefit of Rs.100-125/vehicle) and moderation in metal costs, RMC as a percentage of sales contacted by 187bps QoQ. As a result, EBITDA margins expanded 124bps QoQ. Based on our recent dealer interaction, we continue to believe that brand franchise of Splendor and Passion models continue to remain strong (driven by low maintenance and relatively better re-sale value vs. peers) and Maestro in the scooter segment continues to do well. We remain positive on the stock and maintain Buy rating with a revised target price of Rs.1,877 (earlier Rs.1,721) as we roll forward our target price to FY15E from September 2014 earlier.

- Operating results better than expected: HMCL reported better-thanexpected operating performance in Q4FY13. Net revenues at Rs61.5bn (up 1.8% YoY, down 0.7% QoQ) was 2.3% ahead of estimate benefiting from a richer product mix (average realizations improved 4.8% YoY and 2.3% QoQ). EBITDA margins improved by 124 bps QoQ but saw a drop of 150bps YoY. Driven by positive surprise in RM costs which declined 187 bps QoQ, a richer mix, benefit of favorable JPY and moderation in commodity prices led to better performance. Reported EBITDA at Rs 8.5 bn was ~9% above our est. Net profits at Rs 5.7 bn (down 5% YoY but up 18% QoQ) was ~14.6% above est. led by better operating performance.

- Conference call highlights: 1.) Management expects the 2W industry to grow in high single digits in FY14E and expects to maintain its market share in FY14E. 2.) It has increased prices across models in the range of Rs500-1,500/unit effective April 2013. 3.) Management expects channel inventory to reduce to 4.5 weeks by the end of April'13 (v/s 5.5 weeks in May'13) 4.) Full benefit of favorable JPY will reflect in coming quarters, as pricing for vendor imports is with one quarter lag. 5.) Royalty for new products stood at Rs.600-650m for FY13 (v/s Rs.35m in FY12). 6.) Tax rate to go up from 16.3% now to 22-23% for next 5 years as 30% of profits of Haridwar plant would be taxed as against complete exemption available till date. 8.) Capex spend in FY13 stood at Rs 4.5 bn. Management expects higher capex over the next three years led by the commissioning of Neemrana plant by Q4FY14 (to increase total capacity to 7.7 mn), gradual progress in Gujarat plant, global parts centre and R&D centre.

- Valuations and Recommendations: At the CMP of Rs1,620, the stock is currently trading at 15.5x FY14E EPS of Rs.104.3 and 11.2x FY15E EPS of Rs.144.4. We continue to maintain our Buy rating on the stock based on a revised target price of Rs.1,877 (based on 13x FY15E EPS)

Source : Equity Bulls

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