Hero MotoCorp - 1QFY2014 Result Update - Angel Broking

Hero MotoCorp (HMCL) reported a mixed set of results for 1QFY2014. While the EBITDA margin surprised positively, driven by lower ad spends, top-line and bottom-line were marginally below our estimates. The top-line missed estimates due to lower-than-expected growth in net average realization, while the bottomline was impacted by a higher tax rate. HMCL registered a strong growth of 7-8% in retail sales, though the wholesale volumes declined by 5% yoy, indicating that the company managed to clear some of its inventory. According to the Management, volume growth should revive in 2HFY2014 driven by better monsoons and also due to festival demand. The company expects operating margins to improve 400-500bp over the next 12-15 months on back of the cost reduction initiatives that the company has undertaken. Additionally, HMCL intends to launch at least eight-ten new products (mostly refreshes and variants) in FY2014, scheduled around the festive season. We expect a modest volume CAGR of ~7% over FY2013-15 due to increasing competition, however, profitability is set to improve gradually driven by easing of commodity prices, favorable currency and cost control efforts. We maintain our Accumulate rating on the stock.

Strong operating performance: HMCL's top-line recorded a decline of 1.4% yoy (flat qoq) to Rs.6,160cr, which was marginally lower than our estimate of Rs.6,290cr. The top-line was impacted largely on account of a 4.9% yoy decline in volumes led by slowdown in demand and stiffer competition from Honda Motors and Scooters India. Nevertheless, net average realization surged 3.8% yoy, led by price increases which mitigated the impact of volume decline to some extent. EBITDA margins surprised positively and jumped 103bp qoq (flat yoy) to 14.9%, ahead of our expectation of 14.1%, driven by a 10% qoq decline in other expenditure. This was primarily on account of the lower ad spends and cost control efforts. The net profit reported a sharp decline of 10.9% yoy to Rs.549cr, marginally below our estimate of Rs.568cr, largely on account of a higher tax rate (26.9% as against expectation of 22.5%) due to expiration of tax benefits at the Haridwar plant.

Outlook and valuation: At Rs.1,829, the stock is trading at 12.5x FY2015E earnings. We maintain our Accumulate rating on the stock with a target price of Rs.2,048, valuing the stock at 14x FY2015 earnings.

Source : Equity Bulls

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