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Yet to make inroads into growth segments

Valuation and View‐ Demand outlook positive led by rural recovery

HMCL’s 4QFY22 EBITDA missed our/street estimates by 5‐7% to Rs8.3b leading to margins miss at 11.2% (est 11.8%, ‐100bp QoQ). However, HMCL’s gross margins delivery continues to surprise positively with gross margins expanding ~170bp QoQ to 30.7% (est 29.2%).  This was led by cost savings through LEAP (~300bp) and price hikes. While this is commendable, lag impact of 4QFY22 RM inflation coupled with limited ability to take price hike considering current demand situation should keep margins under pressure in coming quarters.  HMCL’s current valuation of ~12.4x of FY24 EPS largely reflects in its weak franchise in scooters (‐650bp MS loss), premium (ex RE market share gain ~80bp) over last 5 years, despite multiple launches and low exports base.

With expectation of strong demand recovery in 2Ws (4Q retails for HCML surpassing wholesale), should result in op leverage benefits for the company against near term RM headwinds. This coupled with company’s effective cost cutting efforts through LEAP savings should result in ~260bp margins expansion over FY22‐24E. We upgrade our EPS est by 1.9%/0.4% for FY23/24 to factor in higher spares and accessories sales. We maintain BUY with revised TP of Rs2,833 (Rs2,825 earlier) based on ~14x Mar’24 EPS plus Rs101 for Hero FinCorp post 30% discount. Any success on HMCL’s 3‐pronged EV strategy can be a key re‐rating trigger

Result Highlights – LEAP savings of 300bp and price hikes helped GM

Revenues declined 6% QoQ/15% YoY at Rs74.2b (in line v/s ours/cons est) led by ~8% QoQ volume de‐growth partially offset by 2% QoQ growth in ASP at Rs62.4k/unit (est at Rs62.2k).

Despite RM inflation, gross margins expanded for 3rd straight quarter at 30.7% (+170bp QoQ, est at 29.2%). This was led by 300bp cost savings through LEAP program and price hikes taken during the quarter.

Better gross margins were offset by high other op expenses led by bunched‐up of CSR expenses in 4QFY22 (50‐60bp impact). This resulted in EBITDA miss at Rs8.3b (‐14% QoQ, est at Rs8.7b) leading to margins contracting by 100bp QoQ at 11.2% (est at 11.8%, cons at 11.9%).

This was partially offset by lower tax at 21.8% (est at 24.2%) resulting in Adj. PAT at Rs6.3b (‐9% QoQ, in line with our/cons est).

FY22 revenue/EBITDA/Adj PAT declined ~15%/16%/17% YoY.

Recommended final dividend of Rs35/shr (including interim dividend of Rs65/shr, hence Rs95/shr in FY22) v/s Rs105/shr in FY21.

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