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In-line operating performance

Rural revial and budget sops to help support entry level demand

* Hero MotoCorp (HMCL) 3QFY25 margins remained stable QoQ despite higher festive-led discounts due to higher spare part sales and lower EVs in mix. On the back of its new launches and a revival in rural demand, management expects HMCL to post double-digit revenue growth for both FY25E and FY26E.

* While the 2W demand has moderated post-festive, FY26E is expected to be better, driven by rural demand recovery and tax-related announcements boosting buyer sentiment. The stock looks attractive at ~17.4x/16x FY26E/27E EPS. We reiterate BUY with a TP of INR5,000 (18x Dec’26E EPS + INR124/264 for Hero FinCorp/Ather post 20% Holdco discount).

Impact of higher discounts offset by spares revenue and a lower EV mix

* Revenue/EBITDA/Adj. PAT grew ~5%/8%/12% YoY to INR102b/ INR14.8b/ INR12b (est. INR101.3b/INR14.2b/INR11.2b). During 9MFY25, revenue/ EBITDA/adj. PAT grew 10%/14%/15% YoY.

* Net realization wasin line at INR66.2k (est. INR69.2k). Volume grew 6% YoY.

* Gross margin expanded 160bp YoY (+ 90bp QoQ) to 34.2% (est. 33.4%), led by favorable mix (higher spares and lower EVs).

* In 3Q, some of the factors impacting margins were: 1) strong spare part sales at INR 15.55b (+9% YoY) driven by seasonal trends 2) lower impact of the EV segment QoQ at INR1.37b (vs. INR1.75b in 2Q). However, these were offset by higher discounts, which are seasonal in nature.

* This resulted in a better EBITDA margin at 14.5% (+50bp YoY/ flat QoQ, est. 14%). EBITDA grew 8% YoY to INR14.8b (est. INR14.2b).

* ICE EBITDA margin stood at 16%, down 50bp QoQ despite higher spare parts revenue due to elevated festive-led discounts, which is expected to normalize in subsequent quarters.

* Further, higher other income boosted adj. PAT growth, which grew 12% YoY to INR12b (est. INR11.1b).

* The BOD declared an interim dividend of INR100 per share.

Highlights from the management commentary

* Outlook: Post-festive, 2W demand saw a temporary slowdown, but is expected to pick up with the upcoming wedding season and March festivities. On the back of its new launches, management expects HMCL to post double-digit revenue growth for both FY25 and FY26E. Rural contribution increased by 3% during the festive period. The company expects this momentum to continue even in FY26, given positive rural sentiments.

* Impact of the Budget on 2W demand: Income tax cuts benefit the INR0.6- 1.2m annual income segment, which is HMCL’s key customer base. As per management, increased disposable income of INR40k-50k could support 2W EMI payments, boosting demand in the coming year.

* Key management changes: Mr. Niranjana Gupta (CEO) has decided to step down from his post to pursue other opportunities. Mr. Vikram Kasbekar, Executive Director (Operations) has been appointed as the Acting CEO w.e.f. 1 st May’25. Mr. Ranjivjit Singh has also stepped down from his role as Chief Business Officer. The current National Sales Head for India, Mr. Ashutosh Verma, will become the new CBO for the India business unit from 1 st May’25.

* EVs: This business will remain a part of the standalone entity. Lower investments in the last 1-2 months were due to the transition from Vida V1 to V2. With V2 now fully stocked with most dealers, HMCL expects market share recovery in 2W EVs in the coming months.

Valuation and view

* We expect HMCL to deliver a volume CAGR of ~6% over FY25-27, driven by new launches and a ramp-up in exports. HMCL will also benefit from a gradual rural recovery, given strong brand equity in the economy and executive segments.

* We expect a CAGR of ~8%/7%/8% in revenue/EBITDA/PAT over FY25-27. The stock currently trades at ~17.4x/16x FY26E/FY27E EPS. We reiterate BUY with a TP of INR5,000 (18x Dec’26E EPS + INR124/264 for Hero FinCorp/Ather post20% Holdco discount).

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