Published on 13/10/2021 9:59:57 AM | Source: ICICI Securities

Add Hero MotoCorp Ltd For Target Rs.2,965 - ICICI Securities

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Margin recovery on track; festive sales holds key

Hero MotoCorp’s (HMCL) Q1FY22 operating numbers missed consensus estimates as margins came in at 9.4% (up 337bps YoY). Topline declined ~37% QoQ (below consensus) to ~Rs54.9bn as ASP fell ~3.2% to ~Rs54.8k/unit. As per management, margins are likely to revert as price hikes supported by LEAP savings negate the input cost pressures (gross margins down 204bps QoQ). HMCL witnessed demand pressures in the entry-level segment due to weak consumer sentiment and delayed marriage season even as rising TCO hurt affordability.

The electric vehicle product launch from the new-age challenger Ola Electric is likely to bring investors more clarity on the new-age companies’ ‘rightto-win’ in a 2W-like matured business. Hero has strategic partnerships in EVs (e.g. Ather, Gogoro (Link)), which would provide it with multiple roads to success. Maintain ADD.


Key highlights of the earnings call:

* Company reported >90% of its outlets functioning with retail demand at ~80% of precovid levels. It also gained 200bps market share in Q1. Demand uptick in pre-festive period of Onam and Eid was encouraging. Demand recovery is cyclical in nature across regions as tier-III/IV towns witnessed slump due to the initial delays in sowing.

* The difference between the consolidated and standalone profits can be attributed to one-time provisions made in Hero Fincorp during the quarter. Finance penetration in Q1 stood at 41% (normalized: 50%).

* Company saw a 150bps impact on the margins due to commodity inflation (~Rs2,000 per vehicle). However, with price hike of Rs600 per vehicle and Rs1,200 per vehicle in April and July, respectively and LEAP savings, HMCL would offset the cost pressures.

* HMCL will launch its EV scooter in Mar’22 with a chargeable battery system while its JV with Gogoro will be operating on swappable battery infra. The Gogoro based product would be launched in H2FY23.

* Capex for FY22 is expected to be Rs7.5bn-10bn. Spares revenues for Q1 stood at Rs4.55bn (Q4FY21: Rs10.5bn).

* HMCL has initiated operations on Harley Davidson (HD) with 20 dealers and 30 touchpoints. It plans to launch a new model in the cruiser biking segment with HD.

* On exports, HMCL has been able to sustain a run-rate of 300k units per year with good traction across brands and market share gains in 7 of its 8 markets. HMCL has also tied-up with a distributor in Mexico and launched in Nigeria.


Valuation methodology and key risks

HMCL has witnessed weak demand trends since Mar’21 as entry-level demand has been significantly impacted by marriage season demand in Q1. Company’s multipronged strategy (e.g. Ather/Gogoro) bodes well for its future product launches. We retain our target multiple at 16x FY23E EPS of Rs185.3. Maintain ADD with a revised target price of Rs2,965.


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