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Focus on supporting dealers/vendors
BS4 inventory liquidation plan in place
We attended Hero MotoCorp’s (HMCL) conference call on its strategy on (i) handling BS4 inventory post the Supreme Court judgment on 27th March and (ii) business continuity. Key takeaways:
* Unsold BS4 inventory: HMCL had ~150k BS4 inventory as of the lockdown date. According to the SC order, vehicles sold till 31st March can be registered till 30th April (v/s 31st March earlier). Of the unsold BS4 inventory as of 31st March, only 10% can be sold beyond the deadline.
* Online sales during lockdown: Dealers are now selling online based on the earlier inquiries or purchasing on their firm’s name to resell in the secondhand market later. The company is providing incentive of INR10k per motorcycle and INR15k per scooter to support dealers for online sales (exDelhi NCR). It will take back Delhi NCR stock of ~12k units as it has decided not to sell online as well. The company will ascertain how much can be exported and the remaining will be converted in parts.
* Business continuity plan (BCP): HMCL setup a BCP task force earlier in Jan’20 (when COVID-19 was identified as threat in China). Task force is meeting every day since Feb’20. Earlier the focus was on supply chain continuity, which then shifted to lockdown preparation and now it is on restart plans. First priority is to safeguard health of all employees and business partners. Currently, it is not thinking of growth and profits, but health of its ecosystem is important including liquidity within its ecosystem.
* All eight manufacturing facilities (incl. Bangladesh and Columbia) and two R&D centres (India & Germany) have been on work from home/shutdown much before the nationwide lockdown was announced.
* Salaries and vendor payments: It has paid all its contractual workers well in advance without retrenching any people.
* Vendor payments: It is prioritizing payment to its vendors, with full and advance payment to SME/MSME vendors. Vendor notice was precautionary to prioritize resources. It would pay in a graded manner to all vendors.
* Relief package: It has earmarked INR1b for relief efforts, of which INR500m will be toward PM CARES fund and the balance INR500m will be directly spent by the group.
* Operating cost and liquidity: It has fixed monthly operating cost of INR2b. It has over INR40b in liquid funds to sustain expenses, payment obligations, etc.
* Product development: HMCL is not going slow on new product development. Investment in R&D will continue (in premium segment of motorcycle and scooter). It would prioritize capex as the business normalizes.
* Readiness when lockdown is lifted: HMCL is well prepared for restart as and when it happens, as dealers have around one month of BS6 inventory. Pent-up demand will be there and be realized at some point in time, which is difficult to predict as of now. Risk of downgrading not necessarily a threat to the executive segment but could be across segments. It is too early to comment on that.
* Buyback of shares: The focus is to conserve liquidity and ensure business continuity from shareholder value creation perspective. However, promoters have increased some stake through the open market (276k shares equivalent to 0.14% of capital of the company). The promoter’s shareholding in the company has increased from 34.63% to 34.77%.
* E-Carburettor: The company is working on E-Carburettor technology. Though FI systems have better efficiency, e-carburettor is cheaper. The company might introduce them in lower cc segment in future.
Valuation and view: The near-term outlook is challenging amid economic stress across sectors due to lockdown. The lockdown has added pain to the already weak demand environment and anomalies due to BS6 transition. This is largely discounted in the price with the recent fall in the stock price. We believe that clarity on the demand scenario will emerge post the lockdown is lifted as there will be pent-up retail demand and refilling of inventory with BS6 models. Barring near-term volatility, we see limited downside risk from current levels (due to cheap valuations). Also, valuations at 10.4x/9.8x FY21/22E EPS and ~5.6% dividend yield provide protection from any material downside. We have lowered our target multiple to factor in the risk of demand shock due to the impact from coronavirus. Maintain Neutral with a TP of ~INR2,000 (~12x Dec-21 EPS + ~INR98/sh of Hero FinCorp) due to no significant catalyst in the foreseeable future.
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