MOSL: HERO MOTOCORP (Neutral)-Adverse mix, higher RM cost dent performance; No plans to cut price

Hero MotoCorp: Adverse mix, higher RM cost dent performance; No plans to cut price

(HMCL IN, Mkt Cap USD9.0b, CMP INR3112, TP INR3442, 11% Upside, Neutral)

• Adverse mix, Haridwar incentive expiry and higher RM cost hurt margins: Revenue grew 10.4% YoY (+2.9% QoQ) to INR88.1b (est. of INR90.4b). Volumes increased 13.3% YoY (+5.4% QoQ), led by healthy rural demand. Realizations declined 2.5% YoY/QoQ to INR41.9k (est. of INR42.9k) due to Haridwar benefits expiry (~70bp impact) and low spare sales. Gross margin shrank 230bp YoY/QoQ to 30% (est. of 31.5%). However, operating leverage-led decline in other expense restricted EBITDA margin contraction to 40bp QoQ (-60bp YoY) to 15.6% (est. of 16%). Higher tax further restricted PAT to ~INR9.1b (flat YoY, -6% QoQ; est. of ~INR9.9b).
• Earning call highlights: a) Outlook for FY19 remains positive, with double-digit growth for the industry and HCML. b) Not perturbed and not participating in price competition in economy segment. HMCL would focus on brand pull, rather than price push strategy. c) Witnessed ~200bp RM cost pressure in 1Q, with further pressure expected in 2Q. d) Took price increase of ~1% in Jul-18 and would take similar increase in Sep-Oct’18. e) Scooter industry recorded muted volumes due to high base of 1QFY18; no structural issue. 125cc scooters to continue driving growth in the segment.