Angel Broking recommends Accumulate on Hero MotoCorp with a Target Price of Rs. 2,640

Hero MotoCorp (HMCL)'s 4QFY2014 net profit, at Rs. 554cr, surpassed our expectations of Rs. 501cr, driven partly by a better-than-expected EBITDA margin. The improvement in EBITDA margin was on account of cost cutting initiatives. Additionally, substantial increase in other income and lower-than-expected tax rate also boosted the bottom-line. The Management expects EBITDA margin to improve going ahead (targeting an improvement of ~300bp by FY2017) led by an extensive cost rationalization program that it has undertaken. The company expects ~100bp impact to be visible in FY2015. Meanwhile, the company's product pipeline remains strong and it intends to launch four new products in FY2015, including an electric hybrid scooter - Leap, 110cc scooter - Dash and two motorcycles in the greater than 150cc segment. Led by the upcoming launches and new variants / refreshes launched around the festival season, we expect HMCL to clock a ~7% volume CAGR over FY2014-16E. We broadly maintain our volume, revenue and earnings estimates for FY2015/16. We maintain our Accumulate rating on the stock.

Healthy 4QFY2014 results: HMCL's top-line recorded a growth of 6% yoy to Rs. 6,513cr, in-line with our estimate of Rs. 6,451cr, led by a 4.1% yoy growth in volumes and 2.2% yoy growth in net average realization. The volume performance was driven primarily by a strong growth in the scooter segment (15.5% yoy) even as the motorcycle segment registered only a modest growth of 2.7% yoy. The EBITDA margin expanded 67bp qoq to 13.7%, which is marginally higher than our expectation of 13.4%. The margin expansion was led by growth in net average realization which led to gross margin expansion of 80bp sequentially. Additionally, cost control initiatives too led to savings to the tune of Rs. 60cr during the quarter. The net profit for the quarter stood at Rs. 554cr, ahead of our estimate of Rs. 501cr, led by slightly better-than-expected operating performance and benefiting further due to a 17.7% yoy increase in other income and on account of a lower tax rate (at 25.2% as against 26.9% in 3QFY2014).

Outlook and valuation: At Rs. 2,344, the stock is trading at 14.2x FY2016E earnings. We maintain our Accumulate rating on the stock with a target price of Rs. 2,640.

Shares of HERO MOTOCORP LTD. was last trading in BSE at Rs.2682.65 as compared to the previous close of Rs. 2587.5. The total number of shares traded during the day was 51064 in over 5209 trades.

The stock hit an intraday high of Rs. 2700 and intraday low of 2593. The net turnover during the day was Rs. 135479799.

Source : Equity Bulls

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