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In-line results; reasonable performance in a tough environment

Positive outlook with upcoming festive season

* Hero MotoCorp (HMCL)’s performance was driven by efficient cost management despite high cost inflation and op. deleverage. While cost inflation is being managed reasonably well, demand recovery is the missing link in the story.

* We cut our FY22E/FY23E EPS by 5%/1%, factoring in delayed volume recovery. We maintain our Buy rating, with TP of INR3,400 (~15x Mar’23 S/A EPS + INR154/share for Hero FinCorp).

Cost inflation, op. deleverage hurt performance

* HMCL’s 1QFY22 revenue/EBITDA/PAT declined 37%/58%/58% QoQ to INR54.9b/INR5.1b/INR3.7b.

* Volumes declined 35% QoQ. Realizations declined 3.4% QoQ (+2% YoY) to INR53.6k (v/s est. INR55.7k) due to a poor mix (lower non-vehicle sales).

* Gross margins contracted 210bp QoQ (390bp YoY) to 27.5% (v/s est 28.5%) due to commodity cost inflation (~370bp); this was diluted by leap program savings of 150bp and a price hike (~110bp) from Apr’21.

* Furthermore, op. deleverage led to EBITDA margin contraction of 460bp QoQ (+570bp YoY) to 9.4% (v/s est 9.1%). EBITDA declined 57.5% QoQ to INR5.15b (in-line). Adj. PAT declined 58% QoQ to INR3.65b (v/s est INR3.7b).

Highlights from management commentary

* Demand outlook: Over 90% of outlets are operating normally now, and retails are over 80% of pre-COVID levels. Unlike last year, pent-up demand is not that strong this year. Owing to the recent regional festivals, such as Rath Yatra (Gujarat), retails were up 40%, as was the case during Guru Purnima and Eid. It expects a positive trend starting with the 32-day festive season to sustain in 2HFY22 as well.

* RM cost: It expects to neutralize the 2QFY22 cost inflation with a price hike of INR1,200 taken in Jul’21 and leap cost savings. It expects commodities to soften in 2H and lead to margin recovery.

* Exports: It is clocking an export run-rate of 300k/p.a (v/s 186k in FY21). It is seeing positive market share movement in 7 of 8 markets. It has launched a renewed product in Nigeria in the Taxi segment and has trained over 6,000 mechanics in Nigeria. It has also appointed a distributor in Mexico.

* EV strategy: HMCL would launch an in-house product based on fastcharging solutions by Mar’22. Products from the Gogoro partnership would be launched in the latter part of CY22.

* Capex: It has a capex plan of INR7.5–10b p.a. for the next five years; 50% of the capex/investment would be towards EVs, Premium, and exports.

Valuation and view

HMCL is a good proxy on rural market recovery, with a stronghold in the 100cc Motorcycle segment. It has low vulnerability to EVs, as it garners just 8% of volumes from Scooters, and its core 100cc Motorcycle business is less prone to the risks from EVs. The stock trades at ~15.6x/12.9x FY22E/FY23E EPS. Maintain Buy, with TP of INR3,400.

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