Hero MotoCorp's Q2FY19 results (Outperformer) - Steady Performance, Rural Demand the Key
Q2FY19 results
- PAT above estimates on higher other income: Hero MotoCorp’s Q2FY19 PAT at Rs 9.8bn (-3% yoy) was 5% ahead of our expectations. The variance was largely on account of higher other income (Rs 2.2 bn v/s est Rs1.2 bn) even as operational performance met expectations.
- Operating performance in-line: Revenues at Rs 91bn (in-line) increased by 9% yoy led by 5% yoy volume growth. Realizations(+2% qoq;+3% yoy) grew ahead of estimates on account of price hikes and a stronger spare parts sales (+18% qoq). EBITDA at Rs 13.8 bn declined by 5% yoy; flat qoq, while EBITDA margins came in at 15.2% (-40 bps qoq;-220 bps yoy) - higher other expenses (+110 bps qoq) on account of higher ad spends was partially offset by decline in RM costs(-70 bps qoq). Raw material costs though climbed nearly 120 bps yoy. PAT at Rs 9.8bn (-3% yoy) beat estimates on higher other income.
- Concall highlights: (a) Management expects a 8-10% growth in the festive season (Dussehera+ Diwali) even though the initial days of of the festival season has been flat.(b)It has maintained its double digit volume growth outlook for FY19. (c) Currently rural demand is just a tad higher than urban demand; however going forward the management expects rural growth to pick up on account of factors such as MSP increases.(d) It is on track to launch 2 new 125cc scooters in a phased manner in clusters and eventually ramp it up. The company plans to improve its premium portfolio further with new product launches in the coming quarters (e)HMCL has taken a price increase of Rs600-700 in October to counter increase in commodity costs.(f) It does not see any impact of liquidity issues in NBFC on the 2W market due to the short tenure.
Key positives: Lower raw material costs and higher other income
Key negatives: Higher other expenses
Impact on earnings: We cut our FY19 and FY20 EPS by 7%/5%.
Valuations & view
We recognise the risks posed by macro-economic/regulatory factors (insurance costs, higher petrol prices, stronger interest rates) at a time when the industry is facing commodity and competitive pressures. However, we believe HMCL with its strong position in the executive motorcycle segment would be better placed when compared to its peers to weather the storm. Further, it would be a key beneficiary of an expected improvement in rural demand. Given the risks we cut our multiple to 15XFY20 (previously 17X) but maintain an Outperformer rating with a target price of Rs3200.
Hero MotoCorp is engaged in the production and sale of motorized two wheelers up to 350cc engine capacity for both domestic and international markets.
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