Hold Hero Motocorp Ltd For Target Rs.2,910 - ICICI Direct
Steady show, pace of volume recovery is key…
About the stock: Hero MotoCorp (HMCL) is the world’s largest 2-W manufacturer by volume, with domestic market share at 34.5% as of FY22. Its suite of popular models includes Splendor, Passion, Glamour, etc.
* Rural geographies form ~50% sales; 48.3% FY22 motorcycle market share
* Debt-free b/s with strong return ratios; healthy >50% dividend payout ratio
* Recently launched its captive EV offerings i.e. Vida V1 Pro & Vida V1 Plus at | 1.45-1.59 lakh/unit. HMCL is also approaching electrification through collaborative investments in Ather Energy, Gogoro & Zero Motorcycles
Q2FY23 Results: The company reported a healthy performance in Q2FY23.
* Total sales came in at | 9,075 crore up 8.1% QoQ, volumes up 2.7% QoQ
* EBITDA came in at |1,038 crore with margins at 11.4% up 20 bps QoQ. Gross margin expansion for the quarter was at ~80 bps QoQ
* Consequent standalone PAT was at | 716 crore, up 14.7% QoQ
What should investors do? HMCL’s share price has lagged Nifty Auto Index in the past five years, de-growing at ~6.3% CAGR from ~| 3,605 levels in November 2017.
* We maintain HOLD amid slow pace of volume recovery in the 2-W space, premium offerings by HMCL in EV space amid more lucrative offerings by its peers (both existing as well as new age) limiting the volume ramp up
Target Price and Valuation: We value HMCL at revised target price of | 2,910 (14x P/E on FY24E EPS & 2x P/B to its long term strategic investments in FY24E)
Key triggers for future price performance:
* We expect volume, topline to grow at a CAGR of 9.2%, 14.6%, respectively, over FY22-24, driven by need for personal mobility, revival in rural demand
* With positive operating leverage, softening in commodity prices & higher spares revenues, margins are seen reaching 13.2% by FY24E
* Exports, Zero Mobility and Harley tie-up to aid diversification & product mix
* Approaching EV space via organic & inorganic routes with plans to expand captive EV network from present three cities to ~20 cities by March 2023
Alternate Stock Idea: Besides HMCL, in our auto OEM coverage, we like M&M.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with target price of | 1,590
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