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Leap program helps margins, EV plan on track

HMCL reported better than expected results for Q2FY22. Revenue declined 9.8% to Rs84.53bn, but beat our estimate, as realizations grew 14.4% YoY and 10% QoQ. EBITDA margin improved 320bp QoQ and was better than expected at 12.6% on higher ‘Leap’ program savings and price increases. Domestic demand outlook is positive – macro indicators are recovering, good water levels should support better agri output, consumer sentiment is improving, excise duty on fuel has been cut, and the hospitality sector is opening up. Revenue mix is improving, as spares revenue has reached 13%, and contribution of exports and premium segments are improving. EV product is likely to be launched by March’22. We have trimmed our numbers due to delay in 2W recovery and we are introducing FY24 estimates. We continue to value the company at 18x PER, but roll over to mid FY24E EPS. Maintain BUY.

Good results, ahead of estimates

HMCL reported better than expected results for Q2FY22. Revenue declined 9.8% YoY to Rs84.53bn, driven by 21% volume decline. Average selling price grew 14.4% YoY and 10% QoQ. Better product mix and higher spare part revenue drove ASP growth. Gross margins improved by 20bp QoQ to 27.7%, indicating better pass on of RM cost inflation. EBITDA margin improved 320bp QoQ and was better than expected at 12.6% on higher ‘Leap’ program savings. PAT declined 16.7% YoY to Rs7.94bn, beating our estimate of Rs6bn.

Festivals were muted but demand improvement is expected going forward

Festivals were muted, as monsoons got delayed and harvesting was late. However, demand improved towards the end of the period. States like Rajasthan and Punjab, where harvests reached wholesale markets have shown better demand. Outlook is positive – macro indicators are recovering, good water levels should support better agri output, consumer sentiment is improving, excise duty on fuel has been cut, and the hospitality sector is opening up. Inventory is at 5-6 weeks and will remain in this range.

Efforts in exports showing results now

Global sales have reached 300k annual run rate, up from 200k in the last few years. This has been driven by distribution tie-up in Mexico, recovering demand in Bangladesh, introduction of model in Nigeria, and good feedback for Xpulse in Colombia. However, margins on exports are lower than the company average

Maintain Buy

We are positive on HMCL, as domestic demand outlook is improving – macro indicators are recovering, good water levels should support better agri output, consumer sentiment is improving, excise duty on fuel has been cut, and the hospitality sector is opening up. Revenue mix is improving, as spares revenue has reached 13%, and exports and premium segments are improving. EV product is likely to be launched by March’22. We have trimmed our numbers due to delay in 2W recovery and are introducing FY24 estimates. We continue to value the company at 18x PER, but roll over to mid-FY24E EPS. The stock is currently trading at 13.5x FY23E earnings. Maintain BUY.

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