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Placing more emphasis on growth and market share gains

* Hero MotoCorp’s (HMCL’s) 1Q operating performance was in line, while higher ‘other income’ drove PAT beat. HMCL is focusing on expanding its market share, on the back of new launches with margin expected to be in the 14-16% range (14.5% in 1Q for ICE business). De-stocking in 1Q coupled with visible recovery in demand has created headroom for inventory buildup as we approach the festive season.

* We maintain our FY24E/FY25E EPS estimates. We reiterate our BUY rating on the stock with a TP of INR3,630 (16x Sep’25E EPS + INR226/INR116 for Hero FinCorp/Ather after 20% holding company discount).

EBITDA marginsfor ICE back to pre-Covid range of 14-16%

* 1QFY24 revenue/EBITDA/PAT grew 4.5%/28%/51% YoY to INR87.7b/ INR12.1b/INR9.45b.

* Volume declined ~3% YoY, while net realizations rose ~7% YoY (flat QoQ) to INR64.8k/unit. Revenue increased ~4.5% YoY to INR87.7b (est.INR89.1b).

* Gross margin expanded 340bp YoY (down 140bp QoQ) to 30.6% (est. 31.4%). Sequential decline in gross margins was due to a time lag on cost and mix effect.

* However, lower-than-est. other expenses (up 70bp YoY/down 200bp QoQ) led to EBITDA margins gaining 250bp YoY to 13.8% (est. 13.3%). EBITDA for ICE business stood at 14.5%, excluding the impact of EV business. EBITDA improved 28% YoY to INR12.1b (est. INR11.8b).

* Aided by higher ‘other income’, adj. PAT jumped 51% YoY to INR9.45b (est. INR8.5b).

* There was an extraordinary expense of INR1.6b, relating to a VRS scheme for employees.

Highlights from the management commentary

* It is now focused on volume growth and market share, backed by a slew of several product launches, after attained targeted 14-16% EBITDA margins in 1QFY24, where core ICE 2W margins were ~14.5%.

* The company has maintained its earlier guidance of double-digit revenue growth for FY24. Several favorable factors contribute to the demand outlook: a) significantly elevated government spending over the past two years, with the associated benefits, typically manifesting with a time lag b) inflation and interest rates have peaked, and c) Favorable monsoon conditions have prevailed. These factors should augur well for the upcoming festive season.

* Several new product launches are lined-up, following-up on Xoom 100c scooter, Destini Prime 125cc, XTec variants, new Passion Pro, and new Glamour. Multiple product launches are lined-up in the premium segment viz Karizma, HMCLs product on HD platform, etc.

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