Rural Revival to Boost Volume Performance
Hero MotoCorp (HMCL) has delivered better than expected performance in 2QFY20 with its operating margin coming in at 14.5% as against our estimate of 13.8%, down by 62bps YoY (rose 12bps QoQ). Its revenue fell by 17% YoY (-6%QoQ) to Rs75.7bn (vs. our estimate Rs74.4bn), while EBIDTA fell 20% YoY (-5% QoQ) to Rs11bn due to lower RM cost. EBIDTA margin contracted YoY on account of weaker demand, low operating leverage and intensified competition. It’s ASP improved by 5% YoY due to price hike for safety norms and product mix. HMCL’s adj PAT (adjusted for VRS expense of Rs0.6bn) declined by 7% YoY (+16% QoQ) to Rs9.1bn surpassing our estimates by 16%, while reported PAT stood at Rs8.7bn. We believe that current margin of 14.5% is commendable, despite negative operating leverage of 21% YoY, inventory correction, cost inflation for safety norms and overall competitive business environment. In view of expected rural revival in FY21E, company’s strong market share position to capitalise demand recovery and valuation comfort, we reiterate our BUY recommendation on HMCL.
Favourable Monsoon and New Launches to Aid Volumes
We believe that excess rainfall would help on Rabi crop, while its positive effect would benefit rural economy for next 1-1.5 years. HMCL being key rural player, any demand recovery in rural market would benefit company largely. Moreover, it plans number of new launches in FY21, post BS-VI transition gets over. Company’s regular price hike would help it on margins front to some extent. We believe that BS-VI implementation would remain as challenge for the industry over near term, while we expect revival in rural volume by mid-FY21. We expect HMCL’s BS-VI products at most competitive pricing level, which would help it on volumes front in FY21E.
Outlook & Valuation
In view of ongoing slowdown, we lower our volume estimates by 11%/8% and revenues by 9%/7% for FY20E/FY21E. However, we expect lower margin fall than our earlier expectation, therefore, we reduce our EBIDTA estimates by 8%/6% for FY20E/FY21E. Factoring new tax rate, we increase our EPS estimates by 5%/1% for FY20E/FY21E. We introduce our FY22E estimates and roll forward our valuation to FY22E. In view of expected rural revival in FY21E, company’s strong market share position to capitalise demand recovery and valuation comfort, we remain positive and reiterate our BUY recommendation on HMCL with a revised TP of Rs3,050 (from Rs2,500), valuing it at 14x FY22E EPS.
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