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Attractive Valuation; Risk Reward Favorable

Hero MotoCorp (HMCL) reported subdued performance in 1QFY23 with lower EBITDA margin of 11.2% as against our estimate of 12%. Revenue increased by 53% YoY/13% QoQ to Rs83.9bn (3.8% below our estimate of Rs87.2bn), on the back of a volume growth of 36%YoY/17%QoQ and a 13% YoY improvement in average realization due to price hikes. However, ASP was lower than expected due to lower spare revenues. Its EBITDA margin expanded by 183bps YoY (flat QoQ) to 11.2% while EBITDA increased by 83% YoY (up 14% QoQ) to Rs9.4bn (10.2% below our estimate of Rs10.5bn) due to lower-than-expected revenue, higher Ads & sales expenses and commodity cost inflation. HMCL’s PAT came in at Rs6.3bn (up 71% YoY and flat QoQ), 16.4% below our estimate of Rs7.5bn due to lower operating margins and MTM loss on investment. We believe that the better product-mix, regular price hike, likely revival in 2W industry coupled with declining commodity cost would support HMCL’s margin expansion, going forward. In view of likely rural revival, focus on premium segment, HMCL’s market leadership position to capitalize on the demand recovery and attractive valuation leading to favourable risk reward, we reiterate our BUY recommendation on HMCL and revise the Target Price to Rs3,125 (vs. Rs2,900 earlier).

Focus on Premium Segment and Foray into EV Space to Provide Better Traction Ahead

Though we expect the domestic 2W industry to face a near-term demand weakness, we expect revival in rural market going forward on the back of improving sentiments and decent agri output at higher pricing. We believe HMCL would be able to capitalise due to its strong market leadership position and market reach. Rising exports at a better exchange rate would also cushion the margins. Its focus on premium segment would help on market share front as well as on profitability front. It recently launched new scooter XTEC series received strong response. During the quarter, company gained market share across the categories. Company announced launch of first E-2W in upcoming festival with more focus on comfort and charging. Moreover, rising high margin spare parts and accessories would aid margins and profitability going ahead

Outlook & Valuation

We expect HMCL’s domestic volume to witness a CAGR of 11% over FY22-FY24E. Considering company’s market share gain, lower commodity prices and better performance ahead, we increase our revenue/EBITDA/PAT estimates by 6%/7%/3% for FY23E and broadly maintain it for FY24E. In view of likely rural revival, focus on premium segment, HMCL’s market position to capitalize on the demand recovery, foray into E-2W and attractive valuation at 14.6x FY24E, we reiterate our BUY recommendation on HMCL with revised Target Price of Rs3,125, valuing the stock at a revised P/E multiple of 16.5x FY24E EPS

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