Buy Hero MotoCorp Ltd for the Target Rs. 6,350 by Emkay Global Financial Services Ltd
HMCL’s Q1 results were a miss (6% on EBITDA), largely dragged by lower ASPs due to subdued spare sales, though underlying ICE margins rose by 80bps QoQ to 16.4%. HMCL expects to outperform industry amid rural revival and product actions. While the 2W industry has further recovery headroom (remains below FY19 peak); uptick in rural demand is an added growth trigger for HMCL – even as Xtreme 125R is driving rapid improvement in the fast growing, highly competitive 125cc motorcycle category (market share now at 22% vs 11% of Jan-24). We trim FY25E EPS by 2% on ASP miss, retain FY26E and introduce FY27E, building in 11%/16% CAGR in revenues/core EPS over FY24-27E. We maintain BUY with revised upwards SoTP-based TP of Rs6,350/sh (core PER of 23x rolled-over to Jun-26E vs Mar-26E earlier). HMCL is our top pick in OEMs.
An ~80bps QoQ increase in underlying ICE margins; ASPs below estimate Revenue grew ~16% YoY to Rs101.4bn, ~4% below our estimate due to lower-thanexpected ASPs (down 3% QoQ), owing to lower contribution from spares. EBITDA margin was flattish QoQ at 14.4% amid higher RM being offset by lower staff costs and other expenses. As per the management, margin improvement on YoY basis (63bps) was driven by operating leverage, mix improvement, cost savings, and pricing. Underlying ICE margins stand at 16.4% vs 15.6% in Q4FY24. Adjusted PAT grew 14% to Rs11.2bn.
Earnings Call KTAs
1) The company remains optimistic about the ongoing 2W recovery with rural seen leading the charge; the company expects to grow ahead of the industry on the back of its strength in rural, ramp up of 125cc motorcycles, and brand-building activities.
2) Sentiment in rural is positive amid supportive spends by GoI and ongoing monsoons; the outlook is positive for the upcoming festive season; while progress is visible across all markets, rural is seen outpacing urban demand.
3) Apart from upcoming festive, spillover of marriage dates into November is also seen helping demand in the coming months.
4) Share of first-time buyers is showing some recovery in rural as well as in the 125cc segment.
5) Xtreme 125R has brought in incremental customers; the company is working on increasing capacities for the model – has increased to 25K/mth now and would further rise to 40K/mth in a couple of months; HMCL is also working on some product refreshes in the 125cc category.
6) New product actions would be seen in premium motorcycles this year along with scooters incl. Destini refresh, new launches in Xoom, and EV portfolio expansion.
7) Hero 2.0 stores have crossed the 500 mark; Hero Premia store count is now at 40 and would cross 100 by end-FY25.
8) HMCL is working on a number of alternative fuels incl. flex-fuels, ethanol, and even hybrids.
9) Commodity prices are seen being range-bound; the company’s ICE margins are now at the upper end of guided 14- 16% margin band; market share growth would now take priority.
10) HMCL expects losses in EVs to start narrowing amid improving scale, ongoing work on reduction in costs, and changes in architecture; the management expects upcoming EV launches to be PLI compliant.
11) Capex guidance stands at Rs10-12bn.
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