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In-line performance; New product cycle focused on driving mkt. share

During 4QFY24, EBITDAM for Hero MotoCorp (HMCL) stood at 14.3% (+120bps YoY), inline with JMFe led by softening commodity costs and favourable mix. Demand momentum remains healthy and the company expects 125cc+ segment to drive double-digit revenue growth in FY25. Recent premium launches have been received well. Near-term focus is on ramping-up distribution and production of these launches 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.8.5% vol. CAGR (over FY24-26E). We estimate standalone EPS to post c.14.5% CAGR over FY24-26E. Maintain BUY with Mar’25 TP of INR 5,400 (20x forward earnings). Hero remains our top pick in the 2W space.

* 4QFY24 - In-line margin performance: HMCL reported net sales of INR 95.2bn (+15% YoY, -2%QoQ), in-line with JMFe. Volumes during 4Q grew +10% YoY (-5% QoQ) to c.1.39mn units. Realisations grew by 3% QoQ (+5% YoY). EBITDA stood at INR 13.6bn (+25%YoY, flattish QoQ), in-line with JMFe. EBITDA margin stood at 14.3% (+120bps YoY, +30bps QoQ), in-line with JMFe. Adj. PAT stood at INR 10.2bn (+18%YoY, -5% QoQ), 6% below JMFe on lower than expected other income. Spares revenue stood at INR 13.9bn (+10% YoY, -3% QoQ) accounting for c.15% of revenue during 4Q.

* Demand outlook: Management indicated that retail momentum remained strong during Mar-Apr’24 led by wedding and festive related buying. Rural demand, which was lagging urban demand over the last few quarters, is showing improvement. Overall, management remains optimistic on demand scenario driven by a) new product launches, b) higher sales of premium models, c) continued rural recovery (led by normal monsoon) and d) rising finance penetration (currently c.60%). Industry volumes are expected to remain healthy and HMCL is targeting double-digits revenue growth during FY25. Near-to-medium term focus is on driving growth and market share for HMCL led by new product launches.

* Update on new launches: HMCL indicated that Xtreme 125R has been received well among customers and the company is focusing on ramping-up capacity to 30k units/month by Jul’24. Mavrick 440 has also received good customer response and its dispatches have started in Apr’24. Management indicated that HDX440 has gained 10% market share in the regions where it is present. Near-term focus is on production ramp-up of premium models to 10k units/month. The company is also focused on expanding/upgrading distribution network (currently HDX440 sell through 205 outlets). In the scooter segment, HMCL has gained market share in 110cc scooters and the company plans to launch new ICE scooters in 125cc and 160cc segments during FY25.

* 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. HMCL plans 2 new EV launches during 1HFY25 that will cater to – 1) mid-segment with INR 125-130k price point and 2) affordable segment with price point

* Outlook on profitability: During 4Q, EBITDA margin improved by c.120bps YoY (+30bps QoQ) led by lower commodity cost, favourable product mix and judicious price hikes. EBITDA margin for ICE business stood at c.15.6% during 4Q. Impact from EV business was a bit higher (c.130bps) due to higher R&D and marketing spends. The company indicated that it will continue to reinvest higher margin of ICE business to drive 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 support the margin performance. LT margin guidance is maintained at 14-16%.

* Other highlights: 1) HMCL operates through network of 1,000 primary outlets and total 6,000 touch points. The company plans to cover c.60-70% of the primary network under ‘Hero 2.0’ during FY25. 2) HMCL plans to expand its spares and accessories business and has guided for a growth capex of INR 10-15bn over next 2 years. The company strategy is to increase the SKUs from 26k to c.37k units by FY27.

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SEBI Registration Number is INM000010361