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Robust volume growth; Outlook promising

Hero MotoCorp is India’s leading two-wheeler manufacturer in terms of unit volume sales in a calendar year. It holds nearly 50% of the market share in the Indian motorcycle market. The company has 7 manufacturing facilities, including five in India and one each in Colombia and Bangladesh.

* HMCL’s standalone revenue for Q4FY21 surged 39.2% YoY, primarily driven by strong recovery in urban demand and stable rural growth.

* EBITDA margin expanded 330bps YoY to 13.9%, on prudent cost control and judicious price hikes. As a result, EBITDA jumped 83.5% YoY. Adj. PAT rose 39.4% YoY, partially offset by higher taxes (+785% YoY).

* Growing demand and company’s strategic planning along with the proven executional ability improves the business prospects. Despite intermediate uncertainties amidst second wave of COVID, we expect the business to retain its market position and outperform the industry. Hence, we reiterate our BUY rating on the stock with a revised target price of Rs. 3,378 based on 16x FY23E adj. EPS.

Urban demand backed by scooter sales aids topline growth

In Q4FY21, HMCL’s standalone revenue grew by 39.2% YoY to Rs. 8,686cr, aided by volume growth and price hikes. Volume grew on the back of increasing market share with improved business sentiments. Scooter sales saw significant growth, as HMCL regained market share in this segment. Overall revenue was also supported by Parts business which grew competitively as distribution chain improved.

Savings program benefit margins despite inflationary pressure

Company’s EBITDA margin expand 330bps YoY to 13.9% in Q4FY21 (vs 10.6% in Q4FY20) on account of benefits from Leap- II savings program, partly offset by raw material price inflation. Standalone EBITDA number surged 83.5% YoY to Rs. 1,211cr. Consequently, PAT grew 39.4% YoY to Rs. 865cr, partially offset by lower other income (-48.4% YoY) and higher taxes (+784% YoY).

Key concall highlights

* HMCL’s market share rose by 140bps in FY21 primarily supported by increased momentum in scooter sales. 2-wheeler sales volume stood at 1568k units in Q4.

* As an addition to its focus on EV segment, Hero partnered with Gigoro, a Taiwanese EV based company, to establish lithium-ion battery swapping stations in India.

* Board announced a final dividend of Rs. 25 per share and a special dividend of Rs. 15 per share, which along with interim dividend of Rs. 60 per share led full year dividend to Rs. 105 per share (+16.7% YoY).

Valuation

Growing cases due to second wave of COVID, rising uncertainties and extended lockdowns could impact demand in the near-term. However, recovery in urban demand boosting the scooter and premium segment sales coupled with effective executional capabilities of HMCL keeps the company outlook promising over the medium to long term. Therefore, we reiterate our BUY rating on the stock with a revised target price of Rs. 3,378 based on 16x FY23E adj. EPS.

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