BUY on Hero Motocorp - Demand at pre-COVID level - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

While 1QFY21 PAT was weak at Rs 613mn (-90% YoY), the management highlighted that demand is back to pre-COVID level in 2QFY21. Hero has gained market share in the quarter, led by rising demand in rural/semi-urban markets and ramp-up in production. The OEM's foray into the premium segment has got off to an encouraging start, and it is targeting double-digit market share in it. We reiterate BUY (please see our recent note: 'Xtreme' measures, looking beyond COVID).

1QFY21 financials: Volume declined by 69/58% YoY/QoQ to 5.63k units, leading to a revenue decline of 63% YoY. While reported EBITDA margin came in at 3.6% (14.4/10.6% YoY/QoQ), the company spent Rs.2.5bn on lockdown-related costs, adjusting for which margin would be at 12%. The reported PAT at Rs 613mn declined 92/90% YoY/QoQ.

Demand is ahead of supply currently as the vendor network faces start/stop related hurdles, amidst rising demand. As per the management, retails are being driven by the need for personal mobility, and sales have recovered to 95% of the pre-COVID level. First_time customers and additional purchases are driving sales while replacement demand has been impacted. As sales have sustained through June-August, the volumes have exceeded the initial pent-up demand and are expected to sustain going into the festive season as well. Hero's market share has risen by 500bps in domestic 2W segment to 41% vs 35% in FY20 (motorcycle market share at 54% vs 52% in FY20).

Premium segment-eyeing double-digit market share, initial response to 'Xtreme 160' encouraging: The management is targeting a double-digit market share. The OEM will follow up this launch with more models across subcategories in the premium segment. This is reflective of Hero's improved capabilities. The OEM continues to spend on R&D and has invested Rs 7bn in FY20 (higher than the competition).

FI technology should outpace 'E-carb' due to its larger ecosystem: The management believes that FI technology outscores the E-Carb technology on several fronts including scalability and performance. As most competitors have migrated to FI, the ecosystem will develop for this product, which will ensure improved service availability/lower costs.

Maintain BUY: We slightly trim our FY21 estimates by 2%, while keeping FY22/23 unchanged. Our target price is Rs 3,100 at 19x Jun-22E EPS (at a 15% premium to its long-term average trading multiple). Key risks: Slower-than-expected industry growth and a rise in competitive intensity.

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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