04-07-2021 09:35 AM | Source: HDFC Securities Ltd
Add Hero Motocorp Ltd For Target Rs.3,350 - HDFC Securities
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* We are downgrading Hero on rising commodity input prices as well as lowerthan-expected industry growth rates (2W demand has been tepid since the festive season, the recent fuel price increases and potential product price hikes will impact consumer affordability). While the ramp-up in the premium portfolio will drive segmental diversification for Hero, the above factors will impact overall growth rates/profitability.

 

* Monthly volumes have been static: The monthly volumes of Hero Moto and the two-wheeler domestic industry have been moderating post the festive season. Retails were flattish during the festive months and since then the entry-level sales have been impacted (See our note: Divergent trends in PVs and 2Ws). As fuel prices have risen over the past quarter and product price hikes are likely, we believe that the demand recovery trends will be lower than anticipated.

 

* Commodity prices have firmed up: Prices for base metals including Aluminum and steel have risen sharply. These commodities account for 12-15% of the vehicle price and the input price inflation is expected to be at 200-300bps. We believe that given a soft recovery, the OEM will have to partially absorb the cost inflation due to the above, which will partially offset the margin benefits accruing from improved leverage.

 

* Target price: We are lowering our EPS by 6% over FY23E to factor in the above and setting a revised FY23E target price of Rs 3,350. We change our recommendation to an ADD (BUY earlier) as we value the stock at 17.5x P/E, which is at a 5% premium to its long-term average historic trading multiple (vs 19x earlier). Key risks: higher competitive intensity on the downside, A sharp correction in input prices on the upside.

 

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