Hero MotoCorp - Rural recovery led revival priced in - ICICI Securities

Hero MotoCorp (HMCL)'s Q1FY21 operating numbers were below consensus estimates, with EBITDA margin at 3.6% (down 1078bps YoY). Topline declined ~63% to ~Rs29bn as volumes declined 69%. Management guided acceleration of demand momentum into the festive season. We believe demand recovery sustenance needs more widespread growth (e.g. Western region is lagging still) even though rural markets (superior cash flows via farm, MNREGA activities) continue to do well. We maintain our relative preference for rural-facing auto segments, 2Ws stay and HMCL's high rural exposure (>50% demand) coupled with the upcoming festive season tilts near term beneficiary scales in its favour. However, post ~50% rally since Mar'20 lows, valuations have turned fair (~18x PE FY22E). We maintain our HOLD rating on the stock.

- Key highlights of the quarter: Hero MotoCorp reported EBITDA margins of 3.6%, down 1078bps even as gross margins were largely flat (down 83bps). ASP rose 21% to Rs52.7k/vehicle led by BS-VI related price hikes and resilient spare revenues (2.93bn). Gross margins were sustained by a) lower RM costs, b) favourable mix. HMCL has invested additional Rs840mn in Ather Energy (Holding 34.58%) in Q1.

- Key highlights from earnings call: a) Customer mix from replacement segment has gone down; entry segment contributed 30% to sales in Q1 with balance 70% from deluxe segment; b) Covid-19 led lockdown impact on EBITDA was Rs2.5bn for Q1 and margins would have been ~12% if not for Covid-19 outbreak; company has initiated LEAP-2 programme for cost control on expense heads which is likely to add 100bps in savings; c) Fi technology has seen very good response even as E-Carb forms 5-10% of industry; d) with impending festive season, production ramp-up continues even as sales in July reach 95% of pre-Covid levels; e) Hero FinCorp's performance stood strong as it financed ~135k vehicles and GNPA stood at 1% in Q1FY21; and f) capex guidance continues to stand at ~Rs6bn for FY21.

- Maintain HOLD: We believe HMCL is enjoying tailwinds in FY21 from a) continued rural recovery, b) downtrading in motorcycles. However, in case urban (read high Covid-19 impact) customers seek personal transportation, scooter segment could stand to gain. HMCL isn't on top of customer's mind in this category. We like the stock; however, the recent rally (~50%) limits valuation upsides. We tweak our EPS for FY21E/FY22E by -1.8%/3.9%, respectively, while raising our target multiple to 17x (earlier:16x) FY22E EPS. We maintain our HOLD rating on the stock with a revised target price of Rs2,662 (earlier: Rs2,268).

Shares of HERO MOTOCORP LTD. was last trading in BSE at Rs.2927.35 as compared to the previous close of Rs. 2805.45. The total number of shares traded during the day was 117784 in over 11340 trades.

The stock hit an intraday high of Rs. 2933 and intraday low of 2810. The net turnover during the day was Rs. 341184364.

Source : Equity Bulls

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