Buy Hero MotoCorp Ltd for the Target Rs. 4,761 by Motilal Oswal Financial Services Ltd
In-line operating performance
Rural revival and budget sops to support entry-level demand
* Hero MotoCorp’s (HMCL) 4QFY25 margins remained stable YoY and were also in line with our estimates. Reported EBITDA margin came in at 14.2%, while ICE margins stood at 16.1%, adjusted for the INR1.43b loss in EV business.
* We expect HMCL to deliver a volume CAGR of ~5% 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. The stock looks attractive at ~16.6x/15.3x FY26E/27E EPS. We reiterate BUY with a TP of INR4,761 (17x FY27E EPS + INR110/INR140 for Hero FinCorp/ Ather post 20% Holdco discount).
Q4 performance in line with estimates
* HMCL’s 4Q PAT at INR10.5b was in line with our estimate.
* Revenue grew 4% YoY to INR99.4b, largely driven by 5% YoY growth in blended ASP, even as volumes declined 1% YoY.
* ASP was higher by 3% QoQ due to an improved mix, price hikes and the contribution from spare-parts revenue.
* Spare-parts revenue increased 11% YoY to INR15.5b.
* EBITDA margin came in at 14.2% and was in line with our estimate.
* ICE EBITDA margin stood at 16.1% in 4Q, adjusted for the INR1.43b loss in EV business.
* For FY25, HMCL revenue grew 9% YoY to INR408b. Volumes were up 5% YoY, while blended ASP grew 2% YoY.
* EBITDA margin in FY25 improved 40bp YoY to 14.4%. ICE margin stood at 16.2%, up 90bp YoY, adjusted for the INR6.3b loss in EV business.
* FCF for FY25 stood at INR33.7b after capex of INR8.1b.
* Management has declared a final dividend of INR165 per share, which translates into a payout ratio of 72%.
Highlights from the management commentary
* Outlook: Management expects the 2W industry to post 6-7% YoY growth in FY26, largely similar to FY25. Management also expects to outperform industry growth in FY26, backed by its upcoming new launches.
* HMCL has lined up two new affordable EVs, both of which are likely to be launched in Jul’25, to fill up the product gaps. These new products will help to accelerate EV growth in the coming quarters. They believe, at 25-30k monthly sales run rate, they can achieve break-even in EV business. It is, however, likely to be a couple of years away, as per management.
* In FY25, HMCL exports grew 43% YoY over a low base, 2x of industry growth. The company remains aggressive on export growth and is confident of outperforming industry growth going forward.
* HMCL has recently acquired a 34.1% stake in Euler Motors for INR5.1b, making it an associate company. As per management, 3W is an attractive alternate opportunity having an industry size of INR170b p.a. with attractive profit pools (20%+ EBITDA margin). Management believes Euler Motors has a differentiated product offering in the market. They are optimistic about the future growth prospects of this business.
Valuation and view
* We expect HMCL to deliver a volume CAGR of ~5% 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 ~8%/7%/7% in revenue/EBITDA/PAT over FY25-27E. The stock looks attractive at ~16.6x/15.3x FY26E/27E EPS. We reiterate BUY with a TP of INR4,761 (17x FY27E EPS + INR110/INR140 for Hero FinCorp/Ather post 20% Holdco discount).
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