Hero MotoCorp - All eyes on the second half of festive season - ICICI Securities

Hero MotoCorp's (HMCL) Q2FY21 operating numbers were in line with consensus estimates with EBITDA margin at 13.7% (down 81bps YoY). It witnessed positive demand recovery on the back of improving rural sentiment (growing >8% higher vis-à-vis urban markets) aided by strong monsoon and has ramped up production with the expectation of strong festive season. Initial festive season demand has been muted (~4% decline on a YoY basis); however, only ~1/3rd (demand terms) of the festive season is through and management expects improvement. We believe near-term demand trends (driven by rural) have supported HMCL; however, we would need to witness continuation of H1 market share gains for volume growth to outperform further. We maintain HOLD.

Key highlights of the earnings call:

- Management indicated good festive season sales with enquiries improving across regions as first 10 days' festive sales was only down 4% YoY. Navratra-Dussehra period contributed 1/3rd of the festive sales as North and Central regions reach peak sales during Dhanteras period.

- On retail sales: Rural demand remains positive as urban is still witnessing gradual improvement. Currently the rural vs urban growth difference is ~8%, which in normal times (pre-festive) used to be 4-6%.

- Company reported market share gains of ~300bps YoY with strong sales of Splendor, Xtreme and Pleasure Plus models and Destini too gaining traction.

- HMCL achieved its highest ever production of more than 30k units per day for 10 consecutive days. Current inventory is as per the festive season plan and is expected to be ~4 weeks post festive.

- Company took 1-2% price hike across segments and targets margins of 14-16% in the long term. The EBITDA margin performance in Q2 was also supported by lower A&P spend, which is likely to trend higher in Q3/Q4.

- Share of financing in Q2 stood at 40% - of which Hero Fincorp constitutes 50%.

- HMCL has entered into a distribution agreement with Harley-Davidson Inc. for distribution of parts, accessories and merchandise and also a licensing agreement to develop and sell a range of premium motorcycles under the Harley-Davidson brand. Management sounds optimistic of using this association over the long run to create other premium offerings.

- Spare parts revenue for Q2 stood at Rs8bn (up 10.7% YoY) while other operating revenue stood at Rs1.87bn.

Shares of HERO MOTOCORP LTD. was last trading in BSE at Rs.2799.8 as compared to the previous close of Rs. 2893.2. The total number of shares traded during the day was 80304 in over 7591 trades.

The stock hit an intraday high of Rs. 2927.35 and intraday low of 2786.55. The net turnover during the day was Rs. 227536442.

Source : Equity Bulls

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