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Buy Hero MotoCorp Ltd For Target Rs.3,115

Muted performance, steady growth prospects…

About the stock: Hero MotoCorp (HMCL) is the world’s largest 2-W manufacturer by volume, with domestic market share at 37% as of FY21. Its suite of popular models includes Splendor, Passion, Glamour, etc.

* ~50% sales from rural geographies; 51.5% FY21 motorcycle market share

* Debt-free b/s with strong return ratios; healthy >50% dividend payout ratio

* On ground EV presence currently limited to ~38% stake in Ather Energy

Q1FY22 Results: The company posted muted Q1FY22 results.

* Net sales were down 36.8% QoQ to | 5,487 crore

* Margins at 9.4% declined by 460 bps sequentially

* Consequent PAT at | 365 crore recorded a 57.8% QoQ decline

What should investors do?

HMCL’s share price has underperformed Nifty Auto Index in past 5 years, de-growing at 3% CAGR from ~| 3,300 levels in August 2016

* We downgrade from BUY to HOLD given expected relative volume softness

Target Price and Valuation: We value HMCL at revised target price of | 3,115 i.e. 16.5x P/E on FY23E EPS (earlier target price | 3,440)

Key triggers for future price performance:

* Volume CAGR of 9.7% in FY21-23E driven by pent up demand and personal mobility shift post Covid to lead to 13.8% net sales CAGR over that time

* Exports, scooters and Harley tie-up to aid diversification & product mix

* Own EV launch in FY22E would complement Ather presence

* Margins to remain resilient; financial health remains robust.

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 | 1,000

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