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In 4QFY23, EBITDAM for Hero MotoCorp (HMCL) stood at 13% (+190bps YoY; +150bps QoQ), c.100bps above JMFe led by higher operating leverage, softening commodity costs and LEAP savings. Management highlighted that it expects wholesales to improve going forward led by new launches (incl. in partnership with Harley), expected pick up in rural demand, wedding season and premiumization trends. Dealer inventory remains at normalised level of ~6 weeks. Positive operating leverage and commodity prices are expected to support the margins. The company has multi-pronged approach toward EVs with investments in Ather, partnership with Gogoro and recently launched Vida brand. The company remains focused on a) exports, b) premiumisation of MC and c) scooterisation. We expect HMCL to draw support from impending rural recovery leading to c.7% volume CAGR (over FY23-25E). We estimate standalone EPS to post c.20% CAGR over FY23-25E. Maintain BUY with Mar’24 TP of INR 3,200 (15x forward earnings). Recovery in rural demand will be a key monitorable.

* 4QFY23- Margin beats estimates: HMCL reported net sales of INR 83bn (+12% YoY, +3%QoQ), in-line with JMFe. Volumes grew by c.7% YoY (c. 3% QoQ) to c.1.27mn units. Realisations improved c.5%YoY (+1%QoQ) on price hikes. EBITDA margin stood at 13% (+190bps YoY, +150bps QoQ), c.100bps above JMFe led by lower than expected RM costs. EBITDA stood at INR 10.8bn (+31%YoY, +17%QoQ), c.9% above JMFe. PAT for 4Q stood at INR 8.6bn (+37%YoY, +21% QoQ). Spare parts and merchandising revenue stood at INR 12.7bn (+11% YoY) accounting for c.15.3% of revenue during 4QFY23 vs. 15.7% during 3QFY23.

* Demand outlook: Management remains optimistic on demand going ahead driven by a) new product launches, b) ongoing wedding season, c) continued healthy urban demand and d) expect pickup in rural demand (led by government capex on infra). Xtec variants of Glamour & Super Splendor have been performing well. Recently launched Xoom has been received well by customers and the company plans to ramp-up its production going ahead. Management reiterated its plan to launch multiple new products across segments (incl. in partnership with Harley) during FY24. Dealer inventory remains at normalised level of c.6 weeks. In respect of exports, the company aspires to increase the share of exports sales from current c.5% to 10-15% in medium-term.

* Update on EV business: The Company indicated that re-pricing of EVs is across the industry. HMCL too, recently took price cuts on Vida to make it accessible to a larger customer base. Company to continue its focus on driving better cost-efficiency for EVs. During CY23, the company also plans to expand Vida’s presence to over 100 cities by leveraging existing distribution strength along with the exclusive outlets.

* Outlook on profitability: During 4Q, EBITDA margin improved by c. 150bps led by lower RM costs. c.190bps YoY led by higher operating leverage (80bps impact), softening commodity costs and cost control initiatives (LEAP savings). The company took a price hike of INR 600 per unit in April’23 on account of BS6 Phase 2 transition. Benefit of softening commodity prices is expected to continue. Also, the recent announcement of VRS scheme is expected to support margins going ahead. The management indicated that it will continue to reinvest back these savings to drive EV growth going ahead. Overall, it expects higher operating leverage and continued focus on cost saving measures to be the lever for margin expansion going ahead. LT margin guidance stands at 14-16%.

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