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Healthy Qtr; New product cycle focused on driving market share

During 2QFY24, EBITDAM for Hero MotoCorp (HMCL) stood at 14.1% (+260bps YoY; +30bps QoQ), in-line with JMFe led by softening commodity costs, favourable mix and LEAP savings. Festive period has started on a good note. And with slight improvement in rural demand, the segment is expected to witness 15% YoY growth during this period. Recent premium launches have been received well. And, the near-term focus is on ramping-up distribution and production of HD 440X / Karizma (25k+/14k bookings) and EVs. Positive operating leverage, and cost control initiatives are expected to support the margins. We believe, HMCL is at the cusp of market share recovery on the back of new product cycle and expect the company to draw support from impending rural recovery leading to c.7.5% volume CAGR (over FY23-26E). We estimate standalone EPS to post c.21% CAGR over FY23- 26E. Maintain BUY with Sept’24 TP of INR 3,900 (16x forward earnings). Hero remains our top pick in the 2W space.

* 2QFY24- In-line margin performance: HMCL reported net sales of INR 94bn (+4% YoY, +8%QoQ), 1% above JMFe. Volumes grew by c.5% QoQ (-1% YoY) to c.1.35mn units. Realisations grew c.3%QoQ (+5%YoY). EBITDA stood at INR 13.3bn (+28%YoY, +10%QoQ), in-line with JMFe. EBITDA margin stood at 14.1% (+260bps YoY, +30bps QoQ), in-line with JMFe. Adj. PAT stood at INR 10.5bn (+47%YoY, +28% QoQ). Spares revenue stood at INR 13.5bn (+12% QoQ) accounting for c.14% of revenue during 2QFY24 (steady QoQ).

* Demand outlook: Management indicated that festive period has started on a good note with retails growing by 15% YoY during this period. Rural demand, which was lagging the urban demand over the last few quarters, is showing improvement. Overall, management remains optimistic on demand scenario driven by a) new product launches, b) positive outlook on festive sales, c) continued healthy urban demand and d) some signs of improvement in rural regions (while monsoon has been patchy, Rabi crops have been good). The company indicated that replacement demand has also started to recover. Near-to-medium term focus is on driving growth and market share for HMCL led by new product launches. Management reiterated its plan to launch almost one new product every qtr over next 4-6 qtrs. Dealer inventory stands at c.8 weeks and is expected to reach normalise level to c.4-6 weeks by the end of festive season.

* Update on new launches: The company has started dispatches of HDX440 from midOct’23 and have delivered 2k units so far. Bookings for HD X440 continue to remain strong with 2k+ new bookings for HD X440in the last 15 days. Total pending bookings for HD X440 and and Karizma stands at 25k+ and 14k+ units, respectively. Current effort is on production ramp-up (current combined capacity at 10k units) and expanding/upgrading distribution network (100+ premium outlets and 500+ Hero 2.0 outlets by FY24 end). Recently launched Xoom, Passion+, Xtec variants of Glamour & Super Splendor have also been received well by customers. ? Update on EV business: The Company continued its focus on building sales, service and charging network and drive better cost-efficiency for EVs by leveraging vendor ecosystem and charging infra of Ather. Focus is also on ramping-up Vida production (clocking 1k units/week now). During CY24, the company plans to expand Vida’s presence to over 100 cities by leveraging existing distribution strength along with adding 100 exclusive outlets. Focus is also on offering a full EV portfolio going ahead.

Outlook on profitability: During 2Q, EBITDA margin improved by c.30bps QoQ (+260bps YoY) led by lower commodity cost, favourable product mix and cost control initiatives (LEAP savings). Company indicated that EBITDA margin for ICE business stood at 15% during 2Q. Impact from EV business was c.90bps. The management indicated that it will continue to reinvest higher margin for ICE business to drive various strategic initiatives (EVs, premium and revive entry-level demand) going forward. Overall, it expects higher operating leverage and continued focus on cost saving measures to be the lever for margin expansion. LT margin guidance is maintained at 14-16%.

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SEBI Registration Number is INM000010361