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Changing narrative

Hero’s 3Q PAT (+23% YoY) surprised as profits exceeded the Rs 10bn level after several (13) quarters. The narrative at Hero is gradually changing with a focus on premium products as (1) Hero is steadily ramping up its product portfolio in the 150cc+ range; (2) the collaboration with Harley will provide the OEM an entry in the ‘heritage’ segment. We maintain BUY and raise our FY22/23 estimates by ~6% over FY21-23 to factor in the improved operational performance. We set a target price of Rs 3,890 at 19x FY23E EPS (at a 15% premium to its long-term average trading multiple).

* 3QFY21 financials: Volume grew ~20% to 1.84mn units while ASP at ~Rs 53k was up ~17% YoY (+3% QoQ), led by higher premium bikes/spare parts in the mix. Revenue grew 40% YoY to Rs 97.7bn. RM cost, despite higher input costs declined -60bps QoQ. EBITDA margin at 14.5% (+80bps QoQ, - 40bps YoY) benefitted from a 100bps savings from the leap program. Reported PAT grew 23% YoY to Rs 10.8bn.

* Key highlights: (1) Demand outlook: While near-term sales have been soft post festive season, management believes growth drivers remain intact and demand will revive given (a) pro-growth budget, (b) positive rural sentiment – good rabi crop, government support, (c) gradual reopening of the economy – student demand should return, etc. (2) Focus on premium: The company continues to focus on expanding its share in the high-end segment and has gained market share post the launch of the Xtreme 160R. The tie-up with Harley will further increase its presence and allow it an entry in the ‘heritage’ biking segment. Hero is also working on its EV model, which will roll out in CY22E. (3) Exports: The company is steadily increasing its presence in overseas markets (recent tie-up with a large distributor in Mexico). As part of its strategy, the management will spend 70-75% of its focus in the large 2W markets (such as Nigeria, Latam). (4) Margins: The margins have benefitted due to price hikes taken in Oct-20, an improved product mix (higher share of premium bikes and spares) as well as costcutting initiatives (leap program savings of 100bps). Management reiterates its medium-term margin band of 14-16%.

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