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MOSL: HERO MOTOCORP (Neutral)-In-line-expect sequential recovery in 4Q, high-single-digit growth in FY20

Hero MotoCorp: In-line; expect sequential recovery in 4Q, high-single-digit growth in FY20

(HMCL IN, Mkt Cap USD7.3b, CMP INR2612, TP INR2928, 12% Upside, Neutral)

 

• Margins in-line; higher other income restricts PAT decline: Revenue grew 7.5% YoY (-13.5% QoQ) to INR78.65b (our estimate: ~INR77.3b). Volumes increased 5.3% YoY (-16% QoQ) to 1.8m units. Realizations increased 2.2% YoY (+2.6% QoQ) to INR43.7k (our estimate: INR43k), led by price hikes (~1% QoQ) and higher spare sales (+5% YoY). EBITDA declined ~5% YoY (-20% QoQ) to ~INR11b (in-line), with the margin contracting 180bp YoY (-120bp QoQ) to 14%. However, higher other income restricted PAT decline to ~4.5% YoY (-21% QoQ) to ~INR7.7b (our estimate: ~INR7.5b). For 9MFY19, revenue increased 9% YoY, while EBITDA/PAT declined 1%/3% YoY.
• The company announced an interim dividend of ~INR55/share (FY18 dividend: ~INR95; our FY19 dividend estimate: ~INR105).
• Earnings call highlights: (a) HMCL expects volumes to recover QoQ in 4QFY19. It guided for high-single-digit growth in FY20, led by pre-buying in 2HFY20 ahead of BS6 implementation. (b) Rural demand was muted in 3Q, but HMCL expects a recovery from 1QFY20. (c) Launch of Destini in Oct'18 helped capture ~10% market share in the 125cc scooter segment at retail level. (d) Inventory at 6-8 weeks. (e) Financing is not a problem so far (37-40% of volumes are financed). Hero FinCorp (~22.5% of HMCL's volumes are financed by this captive arm) is one of the key financiers. (f) Commodity prices softened somewhat in 3Q, benefit of which should reflect in 4QFY19. (g) Spare parts business grew ~5% YoY in 3QFY19 and ~16% in 9MFY19.