IGI Logo

Rising input costs a key headwind to margins

Hero MotoCorp’s (HMCL) Q3FY21 operating numbers beat consensus estimates with EBITDA margin at 14.5% (down 39bps YoY). Topline grew ~40% (marginally above consensus) to ~Rs98bn as ASP rose ~17% YoY to ~Rs53k/unit. HMCL witnessed improvement in demand during the festive season on the back of improving rural sentiment, however, steep increase in commodity costs is likely to keep margins in check. Though we continue to prefer rural-facing companies; however, as more states are reopening public transportation / educational institutions, we expect scooters to witness release of pent-up demand. HMCL’s stock has appreciated 2x since Mar’20, however, sustenance of current valuations (PE:21x/17x FY22/23 respectively) would need stronger demand. Maintain HOLD.

* Key highlights of the quarter: HMCL reported EBITDA margin of 14.5%, down 39bps, even as gross margins declined 389bps YoY. ASP rose 16.7% to ~Rs53k/vehicle led by BS-VI related price hikes and better product mix. PAT grew 23% YoY to Rs108bn as taxes rates normalised (25% vis-à-vis 13% YoY) and other income declined 53bps with yield tapering off. HMCL invested an additional Rs900mn in Ather Energy (total investment: Rs5bn) in Q3FY21. It also declared an interim dividend of Rs65 per share and a special dividend of Rs 5 per share to mark 100 million sales milestone.

* Retail demand trends remains the key monitorable: We have witnessed 2-W demand retail demand trends softening post festive season (link). HMCL’s inventory levels is likely ~4-6 weeks (our Dec’20 estimate), hence possible led to dispatch reductions (-3% YoY) in Jan’21. Industry is grappling with steep increase in input costs and HMCL needs to witness stronger retail demand trends so as to pass on the additional cost inflation to customers. Entry level segment has been witnessing affordability issues and weaker consumer sentiment. This remains the key to profitability.

* Maintain HOLD: HMCL has been a key beneficiary of good demand revival postcovid on the back of continued rural recovery, enhanced need for personal mobility as access to public transportation remained erratic. Company also continued to launch new products in both scooters and motorcycles to aid volume growth. We have revised our earnings upwards ~7%/6.8% for FY22E/23E on the back of improving operating leverage. We maintain our target multiple at 17x FY23E (roll forward) EPS of Rs193. Maintain HOLD with a revised target price of Rs3,372 (earlier: Rs3,032).

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer