Report
Deepak Jain

Hero MotoCorp's Q3FY18 results (Outperformer) - Steady Quarter, Rural Demand the Key

Q3FY18 results

  • PAT in-line: Hero MotoCorp’s Q3FY18 PAT at Rs8bn (+4% yoy) was in-line with our estimates. Besides operating performance was steady with EBITDA growth of 7% yoy. However higher depreciation and lower other income led to moderation of PAT growth.
  • Steady operational performance; EBITDA margins in-line: Revenues at Rs 73bn (in-line) increased by 15% yoy with realizations growing by 3% qoq on strong product mix and price hikes. Consequently EBITDA was in-line at Rs 11.6 bn (+7% YoY) while EBITDA margins came in at 15.9% (-160 bps qoq;-110 bps yoy) as lower RM costs (-80 bps qoq) was more than offset by higher other expenses on increased advertisement spends (+140 bps qoq) and staff costs (+90 bps qoq). PAT at Rs8 bn (in-line;+4% yoy) moderated due to higher depreciation expenses on account of capitalization of Halol plant while other income was lower on mark to market capital loss.
  • Concall highlights: (a) The management expects commodity costs to harden in 4QFY18.(b) It expects momentum in 2Ws to continue in FY19 and has guided for a low double digit growth led by rural recovery.(c) Demand from Southern and Western states was relatively weaker; while Central and East registered strong growth.(d)It has taken price increase in motorcycles and price correction in scooters in some markets.(e)The company might look at launching products higher than 200cc through a separate channel.(f) LEAP benefits of 50-60 bps accrued during the quarter.(g) It has guided for a capex of Rs2.5 bn over the next 2 years.

Key positives: Lower RM costs and higher realizations

Key negatives: Lower other income and higher depreciation

Impact on earnings: We adjust our FY19 and FY20 EPS downward by ~2% each.

Valuations & view

With overall monsoons being normal (although spatial distribution is a concern) and a budget that could boost rural consumption, there is a reasonable possibility of a revival in rural demand on a low base. HMCL with over 50% of its revenues from rural areas would be a key beneficiary of the revival. 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 (19x Sep-19 EPS).

Underlying
Hero Motocorp Limited

Hero MotoCorp is engaged in the production and sale of motorized two wheelers up to 350cc engine capacity for both domestic and international markets.

Provider
IDFC Securities
IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions,  both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement  amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

Analysts
Deepak Jain

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