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Operating performance in line with estimates

Industry to see double-digit revenue growth in FY25

* Hero MotoCorp (HMCL) posted an in-line operating performance in 3Q. HMCL expects double-digit revenue growth for the industry in FY25 and aims to outperform the industry with new launches. It expects an uptrend in margins from hereon, owing to benign input costs and improving mix.

* We maintain our FY24E EPS but increase our FY25E EPS by 10% to factor in better product mix and volume recovery. Reiterate our BUY rating on the stock with a TP of INR5,560 (18x Mar’26E EPS + INR235/INR198 for Hero FinCorp/Ather after 20% holding company discount).

EBITDA margin for ICE stood at ~16%

* 3QFY24 revenue/EBITDA/PAT grew 21%/47%/51% YoY to INR97.2b/ INR13.6b/INR10.7b (vs. est. INR96.4b/INR13.4b/INR10.4b).

* 9MFY24 revenue/EBITDA/Adj. PAT grew 10%/34%/50% YoY.

* Net realization grew 3% YoY to INR66.6k (est. INR66k). Volumes grew 18% YoY.

* Gross margins improved 210bp YoY (+130bp QoQ) to 32.7% (est. 31.2%) due to benefits of RM cost softening.

* Despite higher other expenses (+20bp YoY/+120bp QoQ as % of sales), EBITDA margins improved 250bp YoY (-10bp QoQ) to 14% (est. 13.9%).

* EBITDA improved 47% YoY to INR13.6b (est. INR13.4b).

* Higher other income was slightly offset by higher depreciation, leading to adj. PAT growth of 51% YoY to INR10.7b (est. INR10.4b).

* The board approved an interim dividend of INR75 per share and a special dividend of INR25 per share. Total dividend is INR100 per share for FY24.

Highlights from the management commentary

* Demand outlook- Overall 2W industry revenue should grow in double digits in FY25 and HMCL expects to outperform the industry with its new launches, thereby implying market share gains. Industry growth is likely to be driven by the 125cc+ segment in FY25 as well.

* Margins: ICE margins stood at 16% in 3Q. The margin impact of EV sales was high in 3Q (200bp) due to the festive season and is likely to be at 100- 150bp in FY24. While input costs would remain stable, the management expects margins to be on a gradual uptrend with an improved mix.

Valuation and view

* We expect recovery in domestic 2W demand to continue, led by stable demand in urban markets, better rural off-take, and a lower base of last year. New product launches in the growing 125cc segment and premium segment should augur well for HMCL. Moreover, stable RM prices and cost savings should drive a ~24% earnings CAGR over FY23-25E.

* HMCL is a pure play in the domestic 2W industry, with a stronghold in the 100cc motorcycle segment. It has low vulnerability to EVs as it garners just 7% volumes from scooters and its core 100cc motorcycle is less prone to EVs. The stock currently trades at ~24.6x/20.7x FY24E/FY25E EPS. Retain BUY with a TP of INR5,560 (18x Mar’26E EPS + INR235/INR198 for Hero FinCorp/Ather after 20% holding company discount).

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