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Undergoing consolidation

Hero MotoCorp’s (HMCL) Q3FY22 EBITDA margin, at 12.2% (down ~45bps QoQ), was in line with our estimate despite 10% volume decline and adverse raw material environment. Volumes and revenues were down ~30% YoY and ~19% YoY respectively, with ASP up ~15% YoY to a record ~Rs61k/unit. Despite raw material cost per unit being ~16% YoY higher, gross margin shrunk by only ~50bps YoY (vs ~300-500bps for other OEMs), largely driven by cost saving initiatives, better mix, focus on spares and price hikes. Management expects FY23 to witness entry-level demand pickup as farm incomes are likely to improve on higher rabi output, marriage season without covid-driven disruption and improving consumer sentiment. With raw material cost inflation stabilising along with continued price hikes, we expect HMCL to return to ~14% EBITDA margin by FY24E. Its strategic partnerships in EVs (e.g. Ather, Gogoro) are likely to augment its own EV portfolio (launch planned for Mar’22). Maintain HOLD with a target price of Rs2,854.

Key highlights of the quarter: EBITDA margin of 12.2% was down 228bps YoY as gross margin fell 47bps YoY to 29%. ASP rose 15% YoY to ~Rs61k/vehicle due to higher export/premium segment mix coupled with higher sales of spares (~Rs11.9bn, up 15% YoY). PAT shrunk ~37% YoY to Rs6.9bn (due to 40% decline in other income).

Key takeaways from earnings call: Management indicated: a) price hikes of Rs1k and Rs0.5k were taken in Oct’21/Jan’22 (Rs0.8k/Rs2.2k were taken in Q1/Q2FY22); b) spares revenue reached an all-time high of Rs11.86bn (up 15% YoY); system inventory stood at 7-8 weeks; c) exports reached an annualised run-rate of 300k units as key markets of Mexico and Bangladesh witnessed economic recovery; d) HMCL is making good inroads into the high-growth 125cc+ scooter segment with XTEC model in Pleasure commanding a 20% share and XTEC model for Destiny to be launched soon; e) on EV plans, HMCL indicated launch of its first EV scooter in Mar’22 followed by a new launch every year; EVs would be launched in both exclusive stores and existing dealership network; f) HMCL would be an exclusive partner with Gogoro for setting up battery swapping stations; however, sharing of infrastructure with other OEMs would be further evaluated when a JV is formed; g) HMCL has invested an additional Rs1.5bn in Ather (cumulative Rs6.5bn) to further strengthen its EV strategy; h) Hero Fincorp raised Rs20bn in its latest funding round with HMCL investing an additional ~Rs7bn; this investment is expected to increase the AUM from Rs260bn to Rs500bn in next three years; finance penetration in Q3 stood at 58% against 37-40% share pre-covid; and i) with 8-10% of sales to students, restart of schools and colleges is expected to further boost sales

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