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In?line; more premium launches planned ahead      

Valuation and View

HMCL’s 2QFY23 results were broadly in?line with revenues/EBITDA/Adj.PAT grew 8%/10.4%/14.7% QoQ. However, EBITDA margins came in lowerthan expected at 11.4% (est 12.1%, ?20bp QoQ), impacted by higher other expense due to bunch?up of marketing expenses. Key highlights ofthe quarter were record gross profit/unit at Rs17.8k/unit. This we believe,to continue expand led by expected decline in RM costs and favorable mix with contribution of premium products to improve gradually. Post witnessing ~20% retail growth in festive (YoY), co indicated volumes are back to95% of pre?covid festive volumes while inventory towards lower spectrum of ~4?6 weeks of normalized levels.

With expectation of strong demand recovery from rural areas, continued cost control and RM headwinds stabilizing, should result in ~300bp margins expansion over FY22?25E (v/s 2QFY23). We cut FY23/24 EPS by 1% and maintain ADD with revised TP of Rs3,036 (Rs3,054 earlier) based on ~14x Mar’24 S/A EPS plus Rs102 for Hero FinCorp post 30% hold?co discount. Any ramp?up in new EV launches supported by Ather’s continued brand acceptance can be a key re?rating catalyst for the stock to watch for ahead. We introduce FY25 estimates and build in revenue/EBITDA/Adj.PAT CAGR of 10.3%/19.6%/20.7% over FY23?35E.     

Result Highlights – In line with ours and street estimates

* Revenue grew 8.1% QoQ/ 7.4% YoY at Rs 90.8b (in?line) led by 2.7% QoQ volume growth at 1.42m units and 5.3% QoQ/ 8.1% YoY growth in ASP at record Rs63.5k/unit (Rs62.2k/unit). This was led by price hikes and increase in spare revenues at Rs12.44b (v/s Rs10.61b in 1QFY23) with overall spare contribution increased to 13.7% (with an aim to increase it to 15% of revenues ahead).

* Gross Margins came in line at 28% (+80bp QoQ/ +20bp YoY) led by ~30?40bp positive impact due to RM cost savings.  

* EBITDA grew by 10.4% QoQ/?2.6% YoY at Rs 10.4b (in?line) with miss in EBITDA margins at 11.4% (est 12.1%, +20bps QoQ) as other expense came in higher at Rs9.6b (est Rs9b) led by bunch?up of marketing expense related to Xtec campaign.

* Other income came in at Rs 921m (est Rs800m). Adj PAT grew 14.7% QoQ (?10% YoY) at Rs 7.2b (in?line).

* HMCL’s 1HFY23 revenue/EBITDA/Adj.PAT grew 25.3%/25.3%/15.6% YoY.

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