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Underlying ICE margins continues to be healthy

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

HMCL’s 2QFY25 results were steady and in-line to our/street with EBITDA margins expanded 40bp YoY (+10bp QoQ) at 14.5%. This was constrained by EV (margin drag of ~200bp) as underlying ICE margins were healthy at 16.5% (vs 16.4% in 1Q, 15.6% in 4QFY24 and 14.5% in 1QFY24), supported by operating leverage, favorable mix, cost savings and price hikes. ~4.2% QoQ increase in ASP was led by favorable mix ~15% QoQ increase in spares revenues with contribution at ~14% (vs 12.5% in 1Q and vs 14.7% in 4QFY24). The management indicated signs of first-time buyers coming back as reflected in positive rural momentum over past 6-7 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 with capacity being ramped to ~40k units/month (vs ~25k earlier). Maintain ADD with revised TP of Rs5,377 (vs Rs5,789) based on ~19x Mar’27 S/A EPS plus Rs148 for Hero FinCorp. 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% over FY24-27E.

Result Highlights – ASP and EBITDA/vehicle came highest ever

* Revenues grew 10.8% YoY (+3.1% QoQ) at Rs104.6b (est Rs102.6b) as volumes/ASP grew 7.3%/+3.3% YoY and +1/+4.2% QoQ respectively at ~1.52m units and Rs68.9k/unit (est Rs67.5k/unit). Of Rs2.7k/unit ASP expansion QoQ, ~Rs14k/unit was led by 2Ws & balance from parts.

* Gross margins came in better at 32.3% (+190bp YoY/+100bp QoQ). However, this was partially offset by higher staff cost at ~Rs6.5b (est ~Rs6.2b, +7.4% QoQ).

* Consequently, EBITDA grew ~14.1% YoY (+3.8% QoQ) at Rs15.2b (est Rs14.5b, cons Rs14.8b), leading to margins expanding by 40bp YoY (+10bp QoQ) at 14.5% (est 14.2%). ICE business margins expanded further to 16.5% (vs ~16.4% in 1Q and ~14.5% in 1QFY24) led by positive mix, benign RM and LEAP Savings of 50bp in 2Q. EV vertical dragged margins by ~200bp at co. level. Hence EBITDA/vehicle came in at Rs9.97k/vehicle (+6.4% YoY/+4.9% QoQ).

* Adj.PAT grew by 14.2% YoY (+7.2% QoQ) at ~Rs12b (est Rs11.2b, cons Rs11.5b).

* 1HFY25 revenues/EBITDA/Adj.PAT grew 13%/17.4%/16.4%.

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