Hero MotoCorp's Q4FY18 results (Outperformer) - Steady quarter, rural demand the key
Q4FY18 results
- PAT in-line: Hero MotoCorp’s Q4FY18 PAT at Rs9.7bn (+13% yoy excluding impact of BSIII costs) was in-line with our estimates. The operating performance was inline with expectations; higher other income offset an increase in tax rate.
- Steady operational performance; EBITDA margins in-line: Revenues at Rs 85.6bn (in-line) increased by 24% yoy driven primarily by volume growth. EBITDA margins came in at 16% (+10 bps qoq;+220 bps yoy) with lower staff costs (-110 bps qoq) offsetting higher other expenses (+60 bps qoq). Other expenses tend to be higher in Q4 due to advertisement/ sports sponsorship expenses. Notably, the gross margins remained steady despite higher commodity costs partially due to cost cutting measures. Other income at Rs 1.6bn grew by 41% yoy on M2M gains which offset higher tax outflow of Rs4.2bn (30.3% tax rate v/s 28.6% in 3QFY18).
- Concall highlights: (a) The managements expects momentum in 2W industry to continue going forward in FY19 and has guided for industry growth rate to touch double digits. (b)Rural growth is expected to be 2-3% higher than average 2W growth rate for HMCL. (c) Raw material costs are expected to in the coming quarters as HMCL negotiates its contracts with suppliers every 3-6 months.(d) Glamour volumes were impacted in 1HFY18 due to supply issues, which has been resolved in the quarter (e)It expects Andhra Pradesh plant to commission from 2HFY20 with an initial capacity of ~500k-750k units.(f) Management has guided for a Rs25 bn capex over the next 2 years.
Key positives: Lower staff costs and higher other income
Key negatives: Higher tax rate
Impact on earnings: We maintain our FY19 and FY20 estimates
Valuations & view
HMCL with over 50% of its revenues from rural areas would be a key beneficiary of a revival in the rural demand (we note that the IMD has predicted normal monsoons). This cyclical uptick could mask the structural challenges before HMCL (high 2W penetration levels, shift towards scooters/premium motorcycles) over the next 1-2 years. Further, any success of new product launches in the premium motorcycle segment would be an additional positive. Maintain an Outperformer with a target price of Rs4,200 (18x FY20 EPS).
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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