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MOSL: HERO MOTOCORP (Neutral)-In-line-Expect recovery from 2QFY20 (mid- single-digit growth)

HERO MOTOCORP: In-line; Expect recovery from 2QFY20 (mid- single-digit growth)

(HMCL IN, Mkt Cap USD7.4b, CMP INR2604, TP INR2912, 12% Upside, Neutral)

 

• Margins in line; lower other income aids PAT decline: Revenues declined 8% YoY (-0.3% QoQ) to INR78.9b (in-line). Volumes declined 11% YoY (-1% QoQ) to 1.78m units. Realizations increased 3.2% YoY (+1.3% QoQ) to INR44.3k (v/s our est. INR43.8k), led by price hikes and higher spare sales (+6% YoY). EBITDA declined 22% YoY (-3% QoQ) to INR10.7b (in-line). EBITDA margins were in line at 13.6% (-240bp YoY/-40bp QoQ); lower other income aided PAT decline to 24.5% YoY (-5% QoQ) to INR7.3b (in-line). In FY19, revenue/EBITDA/PAT grew 4.4%/-6.6%/-8.5%.
• Announced final dividend of INR32/share (FY19 total dividend of INR87/share v/s INR95/share in FY18).
• Earnings call highlights: (a) FY20 industry volumes expected to grow in mid-single-digit with a challenging 1QFY20, with recovery 2QFY20 onwards; HMCL expects to grow ahead of industry; (b) Recovered market share in Entry/Premium motorcycle and scooters in 4Q; (c) Inventory corrected significantly in Mar'19 to 45-50 days, with further correction in 1QFY20 towards target of 4-6 weeks; (d) Mar'19 retails over 700k were flat YoY, despite festivals in Mar'18 (v/s Apr'19). Expect Apr'19 retail to be flat, but May'19 retail should see some growth; (e) Price increase of Rs100-150/unit in 4QFY19 and INR300-350 in Apr'19; (f) FY20 EBITDA margins are expected to remain around 4QFY19 levels.
• Valuation view: We maintain our earnings estimates for FY20/21 as volume decline of 1% is offset by lower employee expense. Valuations at 14.7x/14.1x FY20/21 EPS is a fair reflection of ~4.5% EPS CAGR over FY19-21E. Maintain Neutral with a target price of INR2,912.