Maintain BUY on Hero Motocorp - Outperformance continues - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Hero continues to gain market share (currently at 39%, +300bps YTD), driven by its revamped product strategy and higher rural share. While festive season trends for the industry have been subpar, we believe that Hero has outperformed the market in the mass market 100cc segment. Further, the premium strategy has got a leg up with the OEM's arrangement to sell and manufacture products of Harley Davidson, the benefits of which will be visible in the medium term. We maintain BUY. We trim our FY22/23 estimates by ~6% to factor in lower-than-expected industry volumes and set a target price of Rs 3,380 at 19x Sep-22E EPS (at a 15% premium to its long-term average trading multiple, 20x earlier). The key risks are slower-than-expected industry growth and a rise in competitive intensity.

2QFY21 financials: Volume grew 7% to 1.81mn units while ASP was up 15.3% YoY (-2% QoQ) led by BSVI transition. Revenue grew 24% YoY to Rs 93.6bn. EBITDA margin at 13.7% (vs. 3.6% QoQ, -80bps YoY) benefitted from operating leverage - other expense ratio declined 185bps YoY due to lower marketing expenses. Reported PAT grew 9% YoY to Rs 9.53bn. Adjusted for the VRS of Rs 6bn in the base quarter, PAT grew by 3%. The tax rate was at 23.7% vs. 15.7% YoY due to the change in tax regime in FY20.

Key highlights: (1) Festive season: In the first 10 days of the festive season, retails are at 96% of last year's level for Hero, which is ahead of the industry sales. Navratri accounts for 1/3rd of the festival period and sales are expected to pick up during Diwali in northern India. Rural continues to outperform urban markets. Post festive season, management is confident that inventory will normalise to four weeks. (2) Market share gains: The OEM has gained share across segments. The consumer response to the Xtreme 160cc has been encouraging. (3) Partnership with Harley Davidson (HD) also includes a manufacturing arrangement: As per the distribution and licensing agreements, Hero will sell and service HD motorcycles/parts; besides, the OEM will develop and manufacture a range of premium motorcycles under license from HD in the future.

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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