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Results beat estimates; sales upcycle, EV launches to boost performance ahead

* Q2FY22 EBITDA declined 17% yoy to Rs10.7bn, 22% above estimates, aided by a better share of high-margin spare-part revenues and cost savings. Revenue fell 10% to Rs84.5bn, 7% above estimates due to 42% growth in spare-part revenues to Rs11bn.

* We expect a gradual recovery in domestic volumes, supported by improving macros, and opening of educational institutions/hospitality sector. We build in a 12% volume CAGR in domestic market over FY22-24E. In addition, exports are expected to see a 15% CAGR, owing to improved penetration in Africa and Latin America regions.

* We reduce FY22-24E EPS by 2-5%, mainly due to lower volume assumptions. Following the revision, we build in revenue/earnings CAGRs of 14%/18% over FY22-24E, with healthy FCF generation (~Rs30bn/year or 6% yield).

* Stock catalysts include a rebound in 2W demand and incremental announcements on the EV business. Retain Buy with a TP of Rs3,700 (Rs3,790 earlier), based on 17x core Dec’23E EPS (18x core Sep’23E EPS earlier) backed by a DCF model and the value of investments at Rs102/share.

* EBITDA above estimates: Revenue declined 10% yoy to Rs84.5bn, above our estimate of Rs79bn, mainly aided by higher revenue from spare-part and accessories (up 42%). Volume fell 20%, while realization grew 13%. EBITDA declined 17% to Rs10.7bn, 22% higher than our estimates, owing to higher spare-part revenues and cost savings. HMCL registered cost savings of 320bps (in comparison to last year), mainly led by material cost reduction and some reduction in other variable costs. Overall, adjusted PAT declined 17% to Rs7.9bn, above our estimate of Rs6.3bn on account of higher operating profit. Losses from associates stood at Rs629mn vs. losses of Rs1.4bn in Q1FY22.

* Increasing focus on EVs: HMCL will increase its focus on EVs through its own products (first launch by Mar’22), a joint development with Gogoro (Taiwan) for a swappable battery model (launch in CY22) and investments in Ather Energy. It plans to launch more products every year. The company is setting up an E-2W and battery manufacturing facility at its Andhra Pradesh plant. In the next 5-7 years, HMCL plans to invest Rs100bn (50% for EVs).

* Retain Buy with a TP of Rs3,700 (Rs3,790 earlier), based on 17x core Dec’23E EPS (18x core Sep’23E EPS earlier) backed by a DCF model and the value of investments at Rs102/share. Key downside risks include a delayed recovery in economic activity, heightened competition, lack of pricing discipline in the industry, higher commodity prices and adverse currency movement.

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