Add Hero MotoCorp Ltd For Target Rs.3,189 - ICICI Securities
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Strong cost savings focus aids margins
Hero MotoCorp’s (HMCL) Q4FY21 operating numbers beat consensus estimates as margins came in at 13.9% (up 337bps YoY). Even in the wake of rising input cost (~5% QoQ), gross margins held well at 29.6% (up 12bps QoQ) on the back of price hikes (~2%) and LEAP benefits (~3%). As input costs continue to rise, gross margin in H1 is expected to face further headwinds. HMCL witnessed demand pressures in Q4 on the back of weaker consumer sentiment.
The resurgence of covid has coincided with auspicious wedding season (Apr- Jun), thus is likely to delay recovery into Q3. On long term basis, HMCL has made good strategic choices in EVs with investments/ partnerships (e.g. Aether, Gogoro (link)) which are likely to help it be future ready on technology side. Maintain ADD.
Key highlights of the call:
* HMCL achieved market share gains of 140bps in FY21, powered by scooters (up 270bps to 10% share) and gain in the premium category (up to 4%) from its XPulse and Xtreme brands. In 125cc segment, the company held its market share in rural segment and gained share in urban regions on the back of strong sales of Super Splendor.
* Exports too witnessed growth (8% YoY) clocking 300k units (annualised) run-rate in Q4. Company has recently started operations in Mexico, also improved its market share in Colombia to 6% (from 4% in FY20), and plans to enter Nigeria too in FY22.
* Commodity inflation in FY21 was at 6-7% YoY and was balanced by taking 4% price hike and 2% savings from LEAP cost-saving program (300bps in Q4). Net raw material cost per vehicle was up 4.5% QoQ (2.5% on 2W and 2% on parts). Company expects ~4% cost inflation in FY22.
* BS-VI cost rebasing has helped management of precious metals usage in fuel injection systems and catalytic converters, which in turn aided HMCL to lower its consumption of platinum and rhodium (precious metals costs were up 150-200% on a YoY basis).
* On EVs, HMCL plans to operate on both fixed battery (in-house/Aether) as well as swappable battery system with Gogoro partnership. First EV is likely to launch in CY22.
* Revenue from spares in Q4FY21 stood at Rs10.5bn (Q4FY20: Rs7.5bn) and that for FY21 was ~Rs31.8bn (FY20: Rs29bn) reaching 10% of total revenues. HMCL has been able to improve its net promoter score with customers to 60 from 12 in three years. HMCL spent ~ Rs6bn of capex in FY21.
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