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Margins stable despite weak volumes

Volume guidance intact, led by positive rural sentiments

• Hero MotoCorp (HMCL)’s 1QFY26 PAT at INR11.2b came in above our est. of INR10.5b, led largely by higher other income. HMCL was able to retain its margins despite weak volumes due to price hikes and an improved mix.
• We expect HMCL to deliver a volume CAGR of ~4% 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 ~7%/8%/9% in revenue/EBITDA/ PAT over FY25-27. At ~18.8x/17.3x FY26E/27E EPS, the stock appears attractively valued. We reiterate our BUY rating with a TP of INR5,355 (based on 18x Jun’27E EPS + INR129/235 for Hero FinCorp/Ather post-20% Holdco discount).

Margins intact despite weak demand

• Net revenue dipped 5.6% YoY to INR95.8b (est. INR96.6b).
• Net realizations improved 6% YoY/dipped 2.7% QoQ to INR70k (in line). Volumes were down 11% YoY and 1% QoQ.
• ASP increase on a YoY basis was largely due to price hikes taken over the last four quarters. Further, the sequential ASP decline was due to the reduction in the spare parts business, which is seasonal in nature.
• Gross margin expanded 100bp YoY (-120bp QoQ) to 33.3% (est. 33%), owing to price hikes and favorable mix.
• This resulted in a better-than-estimated EBITDA margin at 14.4% (flat YoY/+20bp QoQ, est. 13.8%).
• EBITDA declined ~6% YoY to INR13.8b (est. INR13.3b). ? Further, higher other income boosted PAT to INR11.2b, largely flat YoY (+4.1% QoQ, ahead of our est. of INR10.5b).

Highlights from the management commentary

• Management retains its 6-7% volume growth guidance for the industry and expects to outperform industry growth, aided by its new launch pipeline.
• Management has indicated that the slight increase seen in input costs is likely to be offset by price hikes and cost savings in Q2. Margin guidance maintained at 14-16% over the long term, however, the same is likely to be at the lower end of the band in the near term.
• New launches for HMCL include two 125cc motorcycles planned for 2Q, Xoom 160, cosmetic refreshes in Xtreme 125R to reignite interest, and new launches from the Harley partnership.
• Despite industry-wide concerns for rare earth supply, management has stated that it has secured supply requirements for 2Q for both ICE and EV models and is continuing to work on long-term alternatives.
• HMCL plans to grow exports by 40% in FY26, with a target of 10% of total revenues and volumes from their global business in the medium term.

Valuation and view

• We expect HMCL to deliver a volume CAGR of ~4% 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 project a CAGR of ~7%/8%/9% in revenue/EBITDA/PAT over FY25-27. At ~18.8x/17.3x FY26E/27E EPS, the stock appears attractively valued. We reiterate our BUY rating with a TP of INR5,355 (based on 18x Jun’27E EPS + INR129/235 for Hero FinCorp/Ather post-20% Holdco discount).

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