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Higher spends on EV hurts margins

Preparing for a healthy festive growth in coming quarters

* HMCL posted a disappointing operating performance in 1QFY25 mainly due to adverse mix and impact of higher spends on EVs. Volume growth has been healthy so far in Q1 and the company is preparing itself for an anticipated strong festive season going ahead on the back of improving rural sentiment.

* We cut our FY25E/FY26E EPS by 9% each to factor in weak operating performance in Q1. We expect a CAGR of ~12%/15%/16.5% in revenue/EBITDA/PAT over FY24-26E. The stock currently trades at ~22x/18x FY25E/FY26E EPS. Reiterate our BUY rating on the stock with a TP of INR5,865 (19x Jun’26E EPS + INR174/INR198 for Hero FinCorp/Ather after 20% holding company discount).

Weak operating performance in Q1

* Revenue/EBITDA/Adj. PAT grew ~16%/21%/19% YoY to INR101.4b/ INR14.6b/INR11.2b (est. INR106.1b/INR16b/INR12.4b).

* Net realizations improved 2% YoY to INR66.1k (est. INR69.1k). Volumes grew 13.5% YoY. ? Gross margins improved 170bp YoY (-130bp QoQ) to 32.3% (est. 33%).

* EBITDA margin stood at 14.4% (+60bp YoY; est. 15.1%).

* Margin was lower than expected due to: 1) adverse mix in favor of entry level products in marriage season 2) lower spare parts sales at 12.5% of revenues Vs 14.7% QoQ 3) impact of spends on EV at INR 1.8bn

* Core ICE margins actually stood at 16.4%, as per management.

Highlights from the management commentary

* Domestic demand outlook: It is seeing a good recovery in both the entry and 125cc segments for the last couple of quarters. Rural growth is also ahead of urban growth for HMCL. The management has indicated its retail market share was ahead of wholesale market share in 2Ws in 1Q.

* Performance in the entry-level and 125cc segments: HMCL has improved its market share in 125cc segment to 20% in 1Q from 13% in 4Q, as per management. It has increased capacity of Xtreme 125cc to 25k per month and expects to increase to 40k per month in the next couple of months.

* Margins: HMCL saw modest raw material inflation of INR340 per unit in 1Q. Input costs are likely to remain range-bound in the near term, as per management.

Valuation and view

* We expect HMCL to deliver a volume CAGR of 8% over FY24-26E, driven by new launches in the 125cc, scooters and premium segments, and a rampup 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 ~12%/15%/16.5% in revenue/EBITDA/PAT over FY24-26E. The stock currently trades at ~22x/18x FY25E/FY26E EPS. Reiterate our BUY rating on the stock with a TP of INR5,865 (19x Jun’26E EPS + INR174/INR198 for Hero FinCorp/Ather after 20% holding company discount).

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