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In line; gains from lower RM cost diluted by operating deleverage

Guides at a strong rebound in volumes, with double-digit growth in FY23E

* HMCL’s performance was driven by higher realization (higher share of premium variants) and efficient cost management, despite higher inflation. The worst of weak demand and commodity cost inflation seems to be behind us. HMCL will launch its own e-2W in Mar’22, which can help to improve its weak presence in the Scooter segment.

* We maintain our FY22E/FY23E EPS estimate. We maintain our Buy rating, with a TP of INR3,150/share (~15x Mar’24E standalone EPS + INR176/share for Hero FinCorp).

Mix-led sharp ASP improvement drives performance

* Revenue/EBITDA/PAT fell 19%/32%/37% YoY to INR78.8b/INR9.6b/INR6.9b 3QFY22. The same in 9MFY22 declined by 1%/10%/12% YoY.

* Volumes declined by 30% YoY (-10% QoQ). Realizations improved by 15% YoY (4% QoQ) to INR61k (est. INR59.9k), led by price hikes, better mix, and higher share of spare sales. Vehicle ASPs improved by 3.8% QoQ.

* Gross margin expanded by 130bp QoQ (-50bp YoY) to 29% (est. 27.6%.), led by better mix and cost saving initiatives. However, higher staff costs and other expenses led to a decline in EBITDA margin by 40bp QoQ (-230bp YoY) to 12.2% (est. 12.1%).

* Lower other income restricted adjusted PAT to INR6.9b (est. INR7b), a decline of 37% YoY.  The board has announced an interim dividend of INR60/share.

Highlights from the management commentary

* FY23 volume growth guidance: The management expects a strong rebound, with double-digit growth in FY23, due to a low base and driven by a much broader recovery in economic activity. Recent footfalls in the secondary network (which is rural based) in markets like Uttar Pradesh and Bihar is very encouraging. It has seen a retail uptick in the marriage driven market in Feb’22. With schools/colleges opening up, confidence at the customer level is returning to normalcy.

* Commodity costs are peaking out. It expects cost pressures to abate. It has largely passed on the entire cost inflation and there is hardly any underrecovery left.

* Hero FinCorp (HFCL) raised INR20b, of which ~INR7b was committed by HMCL. It will help HFCL to double their AUM to INR520b from INR260b, as it has a low gearing ratio (currently at 4.5x). This deal values HFCL ~INR120b (v/s our pre-money valuations of INR70b).

Valuation and view

* We believe we are near the bottom from a demand perspective. This, coupled with stable commodity prices, can drive earnings over the next two-to-three years.

* HMCL is a good proxy on a rural market recovery, with its stronghold being the 100cc Motorcycle segment. It has low vulnerability to EVs, as it garners 8% volumes from Scooters and its core 100cc Motorcycle is less prone to EVs. The stock currently trades ~16.7x/13.7x FY23E/FY24E EPS. We maintain our Buy rating with a TP of INR3,150/share.

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