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MOSL: HERO MOTOCORP (Neutral)-Good performance in tough operating environment

Hero Motocorp: Good performance in tough operating environment

(HMCL IN, Mkt Cap USD6.8b, CMP INR2442, TP INR2690, 10% Upside, Neutral)

 

Cost cutting measures and benign commodity prices drive beat

• Hero Motocorp's (HMCL) strong operating performance was driven by lower commodity prices and cost-saving initiatives. BS6 led the volume weakness (op. lev) and rising RM costs should drag margins over the next 2-3 quarters.
• We marginally upgrade our EPS estimates, but maintain Neutral rating with TP of ~INR2,690 (~14x Dec'21E EPS + INR100/share for Hero FinCorp).

 Above est.; Lower RM leads to strong EBITDA margins

• 3QFY20 revenues/EBITDA/PAT grew -14%/-6%/+15% YoY and declined 12%/15%/8% in 9MFY20.
• Realizations increased ~4% YoY (+1.4% QoQ) to ~INR45.4k (v/s est. ~INR44.8k), led by price increase and higher spare sales.
• Gross margins improved 220bp YoY (+110bp QoQ) due to cost-cutting initiatives as well as favorable commodity price. EBITDA margins at 14.8% (v/s est. 13.8%), expanded 80bp YoY (+30bp QoQ).
• EBITDA declined ~6% YoY (-6% QoQ) to ~INR10b (v/s est. INR9.6b). PBT before EO item declined 11% to INR10.1b (v/s est. INR9.3b).
• Lower tax boosted adj. PAT to INR8.8b (v/s est. INR7.1b).
• The company also declared interim dividend of INR65 per share.