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Q2 EBITDA slightly above estimates; volume outlook remains positive

Q2FY23 EBITDA declined by 3% YoY (3-yr CAGR at -2%) to Rs10.4bn, slightly above our estimate of Rs10bn. Revenue increased by 7% (3-yr CAGR at 6%) to Rs90.8bn, coming in 4% above our estimate due to better-than-expected spare-part sales and realization. We increase our FY23E EPS by 4%, factoring-in higher volume assumptions. We maintain our positive stance, underpinned by: 1) expectations of a cyclical upturn in domestic 2Ws which generally lasts for three years at least; 2) increasing focus on EVs; 3) margin expansion emanating from better scale; and 4) inexpensive valuations. The stock trades at P/E of 15x/13x on FY24/25 estimates. We reaffirm BUY with TP of Rs3,420/sh (Rs3,300 earlier), based on 17x core Dec-24E EPS (Sep-24E earlier) and value of investments/cash at Rs516/share. Key downside risks are lower-than-expected demand in key geographies, increased competitive intensity, failure of new products, and adverse movement in commodity prices/currency rates.

Q2 EBITDA slightly above estimate: Revenue grew by 7% YoY (3-yr CAGR at 6%) to Rs90.8bn, above our estimate of Rs87bn, led by better-than-expected spare-part sales and realizations. Volume declined by 1% to 1.43mn units. Spare-part sales grew by 9% to Rs12.4bn. Realizations increased by 8% to Rs54,835/unit, above our estimates on improving share of XTEC variants (5-7% better pricing) in models. EBITDA declined by 3% (3-yr CAGR at -2%) to Rs10.4bn, beating our estimates by 3%. EBITDA margin contracted by 120bps to 11.4% (Emkay est.: 11.5%). Gross margin expanded by 30bps YoY (+80bps QoQ) to 72%, while other expenses/revenues increased by 140bps YoY (+90bps QoQ) to 10.6%. Other income declined by 41% to Rs921mn, owing to one-time charge of Rs440mn relating to the Gogoro investment. Accordingly, adjusted PAT fell 10% (3-yr CAGR at -8%) to Rs7.16bn inline with our estimate of Rs7.15bn. Share of losses from associates stands at Rs241mn vs. loss of Rs629mn in Q2FY22 and of Rs211mn in Q1FY23. What we liked: 1) Strong growth in the recently-concluded festive season; 2) improved gross margin on sequential basis due to commodity price easing benefits, with more improvement expected. What we did not like: Market-share losses due to higher exposure to rural markets and inventory de-stocking.

Earnings-Call KTAs: 1) Festive-season retails grew 20% YoY and were only 5% below preCovid levels. Rural segment witnessed positive growth. 2) Mgmt expects rural volume improvement ahead, on marriage-season demand and anticipation of a good Rabi crop. 3) Aggressive launch pipeline over the next few years in premium motorcycles developed via own efforts and jointly with Harley Davidson. 4) E-scooter Vida V1 to be launched in 10 cities by Mar-23. 5) Commodity price easing benefits stood at 30-40bps in Q2, with further benefits expected in Q3. 6) Ather stake stands at 37% and the recent transaction implies valuation of Rs60bn. 7) Q2 financing penetration has increased to >60%, with Hero Fincorp share at 35%.

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