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Miss on lower spares revenue; EV focus is firm

HMCL reported a PAT miss on lower realization and lower gross margin. Revenue was Rs54.9bn, 7% below our estimate, as spares contribution was lower at 8% vs 12% in Q4FY21. This also explains the 210bp QoQ decline in gross margin to 27.5%. EBITDA margin declined 450bp QoQ to 9.4% vs our estimate of 10.4%.

To strengthen its global operations, HMCL appointed exclusive distributors in Nigeria, Honduras and Nicaragua during the quarter. It is optimistic on demand over the coming months with the start of the festive season, a healthy monsoon, and encouraging farm activity. On EVs, inhouse and Gogoro products will come in CY22.

To incorporate the impact of RM costs and price hikes, we raise our revenue estimate by 1% and cut our EBITDA margin estimate by 20bp for FY22, and cut our PAT estimate by 4% for FY22 and FY23. We value HMCL at 18x FY23E EPS. Reiterate BUY. The stock is trading at 13.5x FY23E EPS.

Q1FY22 results: Miss on lower spares revenue

HMCL reported a PAT miss on lower realization and lower gross margin. Revenue was Rs54.9bn, 7% below our estimate, as spares contribution was lower at 8% vs 12% in Q4FY21. This also explains the 210bp QoQ decline in gross margin to 27.5%. EBITDA margin declined 450bp QoQ to 9.4% vs our estimate of 10.4%. PAT was Rs3.65bn. Management indicates that spares contribution was lower on lockdowns, and going forward, it should be 10%+ of revenue.

Focused on EV – first product by Mar’22, swap-based product by Dec’22

HMCL intends to launch its own EV model by March 2022, based on fast charging technology. The Gogoro tie-up will be focused on battery-swapping technology and that product will come towards the latter part of 2022. Management feels that a multipronged approach to the EV segment will serve it better, as different geographies within India can have different customer preferences. Initially, since most of the EV transition will happen in scooters, and as scooters form only 10% of HMCL’s mix, the cannibalization will be negligible at the company level.

Focusing on premium segment; Harley product could come next year

HMCL is trying to premiumize across its offerings and not just the 150cc+ segment. In the 150cc+ segment, it indicated that it is focused on building a portfolio and then the volumes. Further, for Harley, it indicated that it will initially focus on distributing the bikes and has 12 dealers and 30 touchpoints that have been doing well. The next part of the plan is to launch a new bike under this retro segment, as it accounts for one-third of the premium segment and 60-70% of the profit pool.

Stock battered on big EV plans by untested startups; unwarranted

HMCL has underperformed the Index, as startups’ EV announcements have been creating a bubble of threat to HMCL’s market share. We believe HMCL is focused on EV with its 3-pronged plan. To incorporate the impact of RM costs and price hikes, we raise our revenue estimate by 1% and cut our EBITDA margin estimate by 20bp for FY22, and cut our PAT estimate by 4% for FY22 and FY23. We value HMCL at 18x FY23E EPS. Reiterate BUY. The stock is trading at 13.5x FY23E EPS.

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