Hero Motocorp - Wholesale flat on a steep base; retail robust - ElaraCapital

- Hero reported robust volume level of 557k for May, posting a flat growth, ahead of expectations of 9% de-growth on steep base

- We note that our dealer checks confirm low inventory levels in the network, hence the high wholesale dispatches are in-line with retail sales

- Hero retailed over half a million more 2W in May (same as last month), mainly due to strong marriage season, impact of the recent MSP hikes (strong liquidity, especially in UP on MSP hike for sugarcane), and continued strength in rural sales

- Dealers in North and West mentioned sales growth of 5%-15% YoY on above reasons on average, led by UP, which recorded a robust double digit volume growth

- Dealers also reported stock levels falling below four weeks on strong MoM pick-up in demand, a healthy trend for coming months' wholesale growth

- While retails sales over the past two months have been buoyant, the litmus test for demand recovery will be in June, when the impact of harvest festivals and marriage season gets over

- We continue to hold on to our thesis that continues cycle of petrol price cuts, which started 12 month back, will revive retail sales in 2W space in FY14E

- Further, while retail sales have been strong, high base is hiding the real trend, which will change from June onwards, when the base corrects sharply

- Exports volumes too, are likely to improve multifold around H2FY14E, as Hero commences full fledged exports to African and LATAM countries, and adds more destinations to its targeted international expansion plan

Our view: We continue to hold on to our thesis of frequent petrol price cuts leading to demand revival in 2W space, especially from the sharply low base starting June onwards. Hero, being the leader in the industry, is likely to benefit the most from this trend, and remains our top pick in the 2W space.

Source : Equity Bulls

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