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Add Hero MotoCorp Ltd For Target Rs.3,189

Hero MotoCorp’s (HMCL) Q4FY21 operating numbers beat consensus estimates as margins came in at 13.9% (up 337bps YoY). Topline grew ~39% (slightly above consensus) to ~Rs87bn as ASP rose ~19% YoY to ~Rs55.4k/unit (driven by BSVI price increases/ mix improvement). Even in the wake of input cost increases, gross margins surprisingly held well at 29.6% (up 12bps QoQ). As input costs continue to rise, gross margin trajectory over 1H would be a key monitorable.

HMCL witnessed demand pressures in 4Q on the back of weaker consumer sentiment in the entry-level segment, rising vehicle prices are likely to further challenge customer affordability. However, as urban reopening happens (2H), we expect scooters to witness release of pent-up demand. Hero has made good strategic choices in EVs with partnerships (e.g. Gogoro (Link)). Maintain ADD.

* Key highlights of the quarter:

HMCL reported EBITDA margin of 13.9%, up down 45bps QoQ, even as gross margins rose 12bps. ASP also rose 4.6% QoQ to ~Rs55.4k/vehicle led by input cost related price hikes and better product mix. PAT grew 41% YoY to Rs86bn as tax rates normalised (23% vis-à-vis 5% YoY) and other income declined 48% with yield tapering off. In FY21 HMCL declared a cumulative dividend of Rs105 per share (~3.6% dividend yield) including a special dividend of Rs25 per share.

* Retail demand trends remains the key monitorable:

We have witnessed 2-W retail demand trends softening post strong start in CY21 (link). HMCL’s inventory levels are likely amongst the highest in the industry (~6-8 weeks (our Apr’21 estimate)), hence possibly leading to despatch reductions (-35% MoM) in Apr’21, plant shutdowns. Industry is grappling with steep increase in input costs and HMCL needs to witness stronger retail demand trends so as to pass on the additional cost inflation to customers. Entry-level segment has been witnessing demand slack and covid cases surge could delay recovery into 2H. This remains the key near-term monitorable.

* Maintain ADD:

HMCL had witnessed good demand revival post-covid on the back of rising need for personal mobility; however, the entry-level segment demand has been impacted by delayed wedding season (North) and surge in covid cases. HMCL’s investment/partnership strategy (e.g. Aether /Gogoro) in EV’s augurs well for future powertrain migration. We have tweaked our earnings estimates by ~-0.4%/-0.2% for FY22E/FY23E and maintain our target multiple at 16x FY23E EPS of Rs199. Maintain ADD with a revised target price of Rs3,189 (earlier: Rs3,197).

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