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Stable margins amid cost pressures

Festive season to see a mid to high single digit growth, led by EV

* Hero MotoCorp’s (HMCL) 2QFY27 earnings came in line with our exp, growing 4.6% YoY to INR14.6b, despite a 50bp beat on EBITDA margins due to better EV profitability, operating leverage and overall cost savings effort.

* HMCL has further consolidated its leadership position in the 100cc segment. The ongoing positive rural sentiment bodes well for stable demand momentum for HMCL. Further, it is delivering a steady outperformance in scooters, both EV and ICE. Exports have also started outperforming, albeit over a low base. Due to better than expected margin performance in 2Q and incremental benefits of PLI flowing through from 3Q, we increase our earnings estimate by 8%/6% for FY27/FY28 respectively. We project a CAGR of ~13%/9%/10% in revenue/EBITDA/PAT over FY26-28. We reiterate our BUY rating with a TP of INR6,100 (based on 18x FY28E core EPS + INR89 for Hero FinCorp after a 20% holdco discount + INR298 for Ather after a 30% holdco discount).

Earnings in line with expectations

* Net revenue grew 21.1% YoY to ~INR147b, broadly in line with our expectations. Growth was led by 10.5% YoY growth in volumes and 9.6% YoY growth in realizations to INR78.6k per unit, supported by pricing actions and a favorable mix.

* Part, Accessories, and Merchandising business grew 27% YoY to INR19.41b.

* EBITDA margin was down 160bp YoY to 13.4% but still beat our exp, as commodity inflation was offset by operating leverage and cost savings.

* EBITDA rose 7.9% YoY to INR19.7b, beating our estimate of INR18.5b.

* However, due to lower-than-expected other income and higher depreciation, PAT came in line with our expectations, growing 4.6% YoY to INR14.6b.

* CFO as of 1HFY27 stood at INR32.4b, while free cash came in at a positive INR25.5b

Highlights from the management commentary

* Management expects the 2W industry to deliver mid-to-high single-digit growth during the festive period, with ICE growth in the low single digits and EVs supporting overall industry growth. Rural demand remains resilient, supported by sowing levels broadly comparable with the previous year and improving festive sentiment.

* HMCL will continue prioritizing growth and market share expansion, with investments focused on scooters, EVs, premium motorcycles, and underpenetrated export markets.

* Capacity additions across ICE scooters and EVs, alongside broader retail distribution, are expected to support volume growth. Export wholesale growth is also expected to return to double digits in 3QFY27 and 4QFY27.

* Further launches across Xtreme, Xpulse, Karizma, and Harley-Davidson, together with Premier dealership expansion, are expected to strengthen HMCL's presence in higher-growth premium segments.

* Despite near-term commodity headwinds, management expects stable 3Q margins and a gradual return to the 14-16% EBITDA margin corridor over the next few quarters, supported by pricing, cost savings, premiumization, and improving EV unit economics.

Valuation and view

HMCL has further consolidated its leadership position in the 100cc segment. The ongoing positive rural sentiment bodes well for stable demand momentum for HMCL. Further, it is delivering a steady outperformance in scooters, both EV and ICE. Exports have also started outperforming, albeit over a low base. We project a CAGR of ~13%/9%/10% in revenue/EBITDA/PAT over FY26-28. We reiterate our BUY rating with a TP of INR6,100 (based on 18x FY28E core EPS + INR89 for Hero FinCorp after a 20% holdco discount + INR298 for Ather after a 30% holdco discount).

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