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In-line performance; demand outlook positive

Guides to double-digit revenue growth for industry in FY25

* Hero MotoCorp (HMCL) posted an in-line operating performance in 4QFY24. Led by a favorable mix and cost savings, gross margins came in better at 33.6% (-20bp QoQ, our est. 32.7%). However, higher other operating expenses, partially due to ~130bp negative impact of EV spending, led to in-line EBITDA margin of 14.3%, up 130bp YoY.

* We expect a CAGR of ~13.5%/15%/17% in revenue/EBITDA/PAT over FY24- 26E. The stock currently trades at ~19.4x/16.5x FY25E/FY26E EPS. Reiterate our BUY rating on the stock with a TP of INR5,320 (18x FY26E EPS + INR137/INR132 for Hero FinCorp/Ather after 20% holding company discount).

EV spending dents EBITDA margin by 130bp in 4Q

* 4QFY24 revenue/EBITDA/Adj. PAT grew ~15%/26%/18% YoY to INR95.2b/ INR13.6b/INR10.2b. FY24 revenue/EBITDA/adj. PAT grew ~11%/32%/41% YoY.

* Net realizations grew 5% YoY to INR68.4k (est. INR66.7k). Volumes grew 10% YoY. Parts and Accessories business (PAM) grew to INR13.8b in 4QFY24 (vs. INR12.7b in 4QFY23).

* Gross margins expanded 150bp YoY (down 20bp QoQ) to 33.6% (est. 32.7%), owing to lower commodity costs, cost savings and favorable mix.

* Led by better gross margins and operating leverage, EBITDA margins expanded 120bp YoY (-80bp QoQ) to 14.3% (est. 14%). EBITDA grew 25.5% YoY to INR13.6b (est. INR13b). The impact of EV spending on the overall margin was 130bp.

* Further, lower-than-estimated other income restricted adj. PAT growth at 18% YoY to INR10.2b (in line).

* FY24 CFO/FCF grew ~1.9x/2.2x YoY to INR49.1b/INR43.6b.

* The board declared a final dividend of INR50/share. The total dividend for FY24 stood at INR150/share vs. INR100/share in FY23.

Highlights from the management commentary

* Outlook- Expect double-digit revenue growth for the industry in FY25. Consumer sentiments were positive in Mar-Apr’24. Despite fewer wedding dates in May-Jun’24, overall sentiment remains positive across rural and urban areas.

* Premium- Aims to increase the capacity to 10k units per month for 440CC platform and Karizma put together in the next couple of months. HD has a 10% market share in the regions where it is present. Supply constraints are resolved now.

* Xtreme 125CC- It has been received well. Expects capacity to reach 25k units per month over the next 2-3 months from 10k units currently.

* Scooters- Model launches such as Xoom 125CC and 160CC are scheduled for 1HFY25. The management believes that most of the white spaces would be filled after these launches.

Valuation and view

* We expect HMCL to deliver a volume CAGR of 9% over FY24-26E, driven by 1) new launches in 125cc, scooters and premium segments, 2) 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 ~13.5%/15%/17% in revenue/EBITDA/PAT over FY24-26E. The stock currently trades at ~19.4x/16.5x FY25E/FY26E EPS. Reiterate our BUY rating on the stock with a TP of INR5,320 (18x FY26E EPS + INR137/INR132 for Hero FinCorp/Ather after 20% holding company discount).

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