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Underlying ICE margins continues to be healthy

View – ICE margins to sustain while EVs ramp-up to continue

HMCL’s 1QFY25 results were weak with EBITDA miss of ~10%/5% to our/street estimates with EBITDA margins expanded 60bp YoY (+10bp QoQ) at 14.4%. This underperformance was led by EV (margin drag of ~200bp) as underlying ICE margins were healthy at 16.4% (vs 15.6% in 4QFY24 and 14.5% in 1QFY24), supported by operating leverage, favorable mix, cost savings. ~3.4 QoQ decline in ASP was a weak piece led by seasonal decline in spares contribution at 12.5% of sales (vs 14.7% in 4QFY24). The management indicated signs of first-time buyers coming back as reflected in positive rural momentum over past 2-3 months, is positive. Going ahead while the management remain confident of broad-based volumes recovery within 2Ws, HMCL is aiming at market share expansion especially in the premium segment led by new product launches. The intended new product launches in the scooter (125cc and 160cc) should help improve positioning and market share gains. The positive customer feedback to Xtreme 125R resulted in demand outstripping supply to result in capacity being ramped to ~40k units/month (vs ~25k earlier). Maintain ADD with revised TP of Rs5,789 (vs Rs5,821) based on ~22x Mar’26 S/A EPS plus Rs133 for Hero FinCorp. We have tweaked FY25E/FY26E EPS to factor in for weak ASP offset by const savings. Management’s action to overhaul brand strategy supported by Ather’s continued brand acceptance provide an additional lever for the stock. We build in revenue/EBITDA/Adj.PAT CAGR of 10.7%/11.5%/12.1% over FY24-26E.

Result Highlights – ICE cushions large drag from EV ramp-up

* Revenues grew 15.7% YoY (+6.6% QoQ) at Rs101.4b (est Rs106.5b) as volumes/ASP grew 13.5%/+1.9% YoY and +10.3%/-3.4% QoQ respectively at ~1.53m units and Rs66.1k/unit (est ~Rs69.4k/unit). Decline in ASP QoQ was led by lowe share of spares at 12.5% (vs 14.7% in 4QFY24).

* Gross margins came in lower at 32.3% (+170bp YoY/-130bp QoQ). However, this was partially offset by lower staff cost at ~Rs6.1b (est Rs6.6b, -5.5% QoQ).

* Consequently, EBITDA grew ~21% YoY (+7.4% QoQ) at Rs14.6b (est ~Rs16.2b, cons Rs15.4b), leading to margins expanding by 60bp YoY (+10bp QoQ) at 14.4% (est 15.2%). ICE business margins expanded further to ~16.4% (vs ~15.6% in 4Q and ~14.5% in 1QFY24) led by operating leverage, favorable mix, cost savings and better pricing. EV vertical diluted margins by ~198bp or equivalent to Rs1.81b impact. Hence EBITDA/vehicle came in at Rs9.5k/vehicle (+6.6% YoY/-2.6% QoQ).

* Adj. PAT grew by 18.8% YoY (+10.5% QoQ) at ~Rs11.2b (est Rs12.7b).

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