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Strong cost control drives margin beat Outperforms in multiple segments

* Hero MotoCorp’s (HMCL) 1QFY27 PAT at INR14.5b beat our estimates thanks to a healthy margin performance, aided by strong control in other expenses. Margins fell only 110bp YoY to 13.3% despite a sharp contraction in gross margins.

* 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. Moreover, exports have started outperforming, albeit over a low base. We project a CAGR of ~10%/8%/9% in revenue/EBITDA/PAT over FY26-28. We reiterate our BUY rating with a TP of INR6,560 (based on 18x FY28E core EPS + INR89/744 for Hero FinCorp/Ather after 20% holdco discount).

Highlights from the management commentary

* Following the 14% volume growth achieved in 1QFY27, management expects growth momentum to continue in 2QFY27, before growth decelerates over a high base of 2H. For FY27, management expects 2W industry to post high-single-digit growth.

* Management expects commodity costs to rise marginally in 2Q, which is likely to be offset by mix improvement and cost-cutting initiatives.

* HMCL reiterated its medium-term EBITDA margin target of 14-16%, although management acknowledged that achieving this target in the near term could be challenging given the prevailing inflationary trends.

* Around 60% of the EV portfolio is now certified under the PLI scheme, with management targeting 100% certification by CY26 end.

* Overall, scooter production currently stands at ~65k units per month, with management targeting doubling of total capacity by FY27-end. Around twothirds of the planned expansion has already been completed, with the remaining expansion expected to be commissioned by 4QFY27.

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 now delivering a steady outperformance in scooters, both EV and ICE. Moreover, exports have started outperforming, albeit over a low base.

* We project a CAGR of ~10%/8%/9% in revenue/EBITDA/PAT over FY26-28. We reiterate our BUY rating with a TP of INR6,560 (based on 18x FY28E core EPS + INR89/744 for Hero FinCorp/Ather after 20% holdco discount)

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