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Above est.; price increases, cost savings drive beat

Demand recovery, success in Premium & Exports key monitorables

* Hero MotoCorp (HMCL)’s strong performance was driven by cost management and price increases to offset cost inflation. Domestic demand recovery and continued traction in weak areas (Scooter, Premium Motorcycle, and exports) are key monitorables.

* We have raised our EPS estimate for FY21/FY22E by 5%/7%, factoring in price increases and cost savings. We maintain our Buy rating, with TP of INR4,000 (~18x Mar’23 S/A EPS + INR154/share for Hero FinCorp).

Cost inflation more than offset by price increase and cost-cutting

* HMCL’s 3QFY21 revenue/EBITDA/PAT grew 40%/36%/23% YoY to INR97.8b/INR14.1b/INR10.8b. 9MFY21 revenue/EBITDA/PAT declined 2.1%/15%/14% YoY to INR221b/INR28.1b/INR21b.

* Volumes grew 20% YoY and realizations were up 17% YoY (+4.4% QoQ) to INR52.9k (v/s est. INR52.1k), driven by price hikes taken by the company.

* Gross margins expanded 60bp QoQ (-390bp YoY) to 29.5% (v/s est. 28.5%) as the impact of commodity price inflation of ~100bp was offset by price hike in Oct’20 as well as savings from LEAP-2 initiatives of ~125bp

* This translated to EBITDA margin expansion of 70bp QoQ (-40bp YoY) to 14.5% (v/s est. 13.4%) – benefit was seen from gross margin expansion as well as operating leverage. Higher other income further boosted adj. PAT growth by 23% YoY to INR10.8b (v/s est. INR9.5b).

* The company announced dividend of INR70/share (INR65 interim dividend + INR5 special dividend).

Highlights from management commentary

* The demand outlook is positive considering macro improvements are seen across. It has seen market share gains in domestic (190bp) and exports (90bps in 3Q). Some of the consumer segments – such as Students (10-12% of volumes), Migrant Labor, and First-time Buyers – are yet to see recovery.

* Loss of market share in 125cc Motorcycle is primarily attributable to loss in certain states such as Andhra Pradesh (AP), Telangana, and parts of East. The new Glamour has gained share in all of the markets except the ones mentioned earlier. It is undertaking initiatives to address these micro markets as well.

* The Spare Parts business is benefitting from a change in the distribution strategy adopted 1.5 years back. The company is now delving deeper into the market, with a focus on micro markets. As a result, the business grew 29% YoY to INR10.3b.

* It expects further cost inflation in 4Q and has taken price increases from Jan’21. It has maintained its EBITDA margin target of 14–16%.

Valuation and view

* The stock trades at ~18.2x/16.1x FY22/FY23E EPS. We value HMCL at 18x Mar’23E EPS, factoring in improved volume visibility and lower risk of value outflow from HMCL’s areas of strength. Maintain Buy, with TP of INR4,000.

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