Well placed in the current cycle
4QFY20 Adj. EBITDA margins at 13.5% (flat YoY) were significantly ahead of our estimates. Hero has gained market share (+130bps) in FY20. We believe that the OEM is well placed in the current cycle due to its higher exposure to the rural segment/entry segment portfolio. We reiterate Hero as our preferred pick in the auto sector
* 4QFY20 Financials:
Volumes declined by 25/13% YoY/QoQ to 1.33mn units. However, the average realization was up 6/3% at Rs 46.7k on higher BSVI dispatches (~half of 4Q vols). Revenue declined 21% YoY (vs. estimates of -25%). While reported EBITDA margin were at 10.6%, the adj. margins came in at 13.5% (flat YoY) - one offs included Rs 1.1bn (180bps) as compensation to dealers for BSIV stock, Rs 570mn towards GST related write down. While 4Q tax rates came in at 4.6%, full year tax rate was 20.6%. Reported PAT of Rs 6.2bn (-15/-30% YoY/QoQ) was above estimates.
* Call & other takeaways:
(1) Downtrading: As incomes are affected due to COVID-19, the management expects down trading. Further, customers are expected to move towards personal transport. These factors will drive entrylevel bike sales. (2) Sales picking-up: Post the lockdown being relaxed, a positive uptick is seen pan-India expect in COVID affected states like Maharashtra and Gujarat. Early retails trends are encouraging at ~70% of pre-COVID levels. Hero is also launching the Xtreme 160cc bike shortly in the premium segment. (3) Rural segment to drive volumes: Given healthy agricultural activities such as a good crop, expectation of normal monsoons and reforms rolled out by the government, rural and semi-urban areas are expected to do better. Hero derives ~50% of sales from the rural segment and will benefit from its well spread service network. (4) Financing: In FY20, the total sales via financing was 43%; of which 46% was done by Hero Fincorp (vs. 41% in FY19). Banks are now stepping up to lend to this segment. (5) Cost savings: The co has rationalized capex spends for FY21 by nearly half to Rs 6bn and has doubled its target under the Leap-II program to 100bps. Commodities prices are expected to remain soft, which will be supportive of margins.
* Maintain BUY:
We increase our FY21/22E EPS by 15/13% to factor in the better than expected margin outlook. We value the stock at 17x on FY22E EPS (vs. 16x earlier), similar to its long term historic average trading multiple) and set a revised TP of Rs 2,650. The stock has an attractive dividend yield of ~4%. Key risks: Extended impact due to COVID, increase in competitive intensity.
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