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Above est.; price increases, cost savings drive beat

RM cost inflation remains a key challenge

* HMCL’s performance was driven by efficient cost management under the Leap-2 program. Ongoing cost inflation will be managed by cost saving initiatives and price hikes.

* We maintain our FY22E/FY23E EPS estimate. However, we cut our P/E multiple to 16x Mar’23 EPS (v/s 18x earlier) owing to volume uncertainty and risk of electrification. We maintain our Buy rating with a TP of INR3,500/share (~16x Mar’23E standalone EPS + INR154/share for Hero FinCorp).

Cost inflation more than offset by price increase and cost-cutting

* Revenue/EBITDA/PAT grew 39%/83.5%/39% YoY in 4QFY21 to INR86.9b/INR12.1b/INR8.6b. The same grew 6.8%/1.5%/-3% YoY in FY21 to INR308b/INR40.2b/INR29.6b.

* Volumes grew 17.5% YoY and realizations grew 18.5% YoY (+4.6% QoQ) to INR55.4k (est. INR53.6k), led by price hikes taken by the company.

* Gross margin declined 120bp YoY (+10bp QoQ) to 29.6% (est. 28%) as the impact of commodity price inflation of ~500bp was offset by ~300bp savings under the Leap-2 program and balance through price increases and mix.

* EBITDA margin expanded by 340bp YoY (-50bp QoQ) to 13.9% (est. 12.3%). Lower other income restricted adjusted PAT growth (39.4% YoY) to INR8.65b (est. INR7.7b).

* Total dividend for FY21 stood at INR105/share. It includes a special dividend of INR15/share. The proposed final dividend is INR25/share + INR10/share of special dividend.

Highlights from the management interaction

* The management said the demand outlook for 1QFY22 would be challenging. It expects normalcy to return from 2QFY22 onwards and its outlook remains positive as the underlying demand drivers are intact.

* RM cost: It expects another 4% inflation in commodity cost (on top of the 6-7% in FY21) in FY22, which would be diluted through 2% savings in cost and the balance from price hikes (already raised prices by ~2% in Apr’21).

* Cost reduction has happened on a rebased cost after the transition to BSVI. The 60-70% reduction in cost was driven by reducing the content of precious metals in its catalytic converter.

* EV strategy: With its recent JV with Gogoro, it now has a three-pronged strategy for EVs: a) stake in Ather, b) development (led by a German R&D center) of a fixed battery system, and c) JV with Gogoro on a battery swapping system. It plans for product launches under the Gogoro JV and its own development in CY22.

Valuation and view

* The stock currently trades ~16x/13.6x FY22E/FY23E EPS. We value HMCL at 16x Mar’23E EPS owing to volume uncertainty due to the second COVID wave and risk of electrification. We maintain our Buy rating with a TP of INR3,500 per share.

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