Hero MotoCorp's Q4FY19 results (Outperformer) - Inline Quarter; weak trends continue

Q4FY19 results

• Inline quarter: Hero MotoCorp’s Q4FY19 PAT of Rs 7.3bn (-25% yoy) was inline with estimates. The operational result was on expected lines.
• Operating performance in-line: Revenues at Rs 78.8bn (-8% yoy) was weak largely on account of a 11% yoy volume decline with a ~2% qoq increase in realizations. The higher realisations were a reflection of price hikes taken on account of a change in  safety norms. EBITDA margins at 13.6% (down 40bps qoq; down 240bps yoy) were impacted by negative operating leverage/higher commodity costs (+133bps yoy). Even on a sequential basis, negative operating leverage led to an increase in other expenses/employee costs. PAT was aided by a treasury gains on the back of higher other income.
• Concall highlights: (a) The management guided for an industry growth in mid single digits (previous guidance: high single digits) in FY20. H1 is likely to remain flat with H2 registering a strong growth on emission linked pre-buying and a normal monsoon.  (b) The inventory with dealers stands at 45-50 days which the management hopes to further bring down to under 40 days – hence there will likely be a couple of months of inventory correction (c) In the near term the EBITDA margins could likely remain in the current range (13-14%) though this would likely improve over a period of time. (d) Rural demand has been sluggish partly due to lower rabi crop sowing and stress in the agricultural sector. Going forward, the company expects rural demand to show an uptick on a normal monsoon (e)The company expects commodity pressures to ease a bit in the coming quarters.(f) The decline in scooter sales maybe linked to higher fuel prices in H2 (scooters are less fuel efficient than motorcycles).

Key positives: Higher realisations

Key negatives: Higher other expenses

Impact on earnings: We cut our FY20 and FY21 EPS by 10%/12% on lower volume growth/lower margins.

Valuations & view

There are clear near term pressures on the 2W segment with regulatory led cost pressures (ABS/Insurance) coming at a time when competitive pressures in the industry are rising. However, we believe HMCL with its strong position in the executive motorcycle segment would be better placed than its peers to weather the storm (it is least affected by ABS implementation). HMCL would be a key beneficiary of an expected improvement in rural demand on the back of government sops. The valuations at ~13.5XFY21 are inexpensive. Maintain an Outperformer rating with a target price of Rs2900 (14XFY21 EPS).