MOSL: HERO MOTOCORP (Neutral)-In-line-higher other income boosts PAT; sluggish start to Navratras festival

HERO MOTOCORP: In-line; higher other income boosts PAT; sluggish start to Navratras festival

(HMCL IN, Mkt Cap USD7.9b, CMP INR2899, TP INR3280, 13% Upside, Neutral)

• Margins in-line; higher other income boosts PAT: Revenue grew 8.6% YoY (+3.2% QoQ) to INR90.9b (in-line). Volumes grew 5.5% YoY (+1.4% QoQ) to 2.1m units. Realizations increased 2.9% YoY (+1.8% QoQ) to INR42.6k (est. of INR42.4k), led by price hikes and higher spare sales. Gross margin of 30.7% (-110bp YoY, +70bp QoQ) exceeded our estimate of 30%. This, however, was offset by higher other expense of INR9.8b (est. of INR9b), leading to in-line EBITDA margin of 15.2% (-220bp YoY/-40bp QoQ). One-offs related to interest from refund of income tax deposits led to higher other income of INR2.2b (est. of INR1b) and PAT of INR9.8b (est. of INR9b). In 1HFY19, revenue/EBITDA/PAT grew 9.5%/0.2%/-2%, implying residual growth of ~10%/4%/-2% in 2HFY19.
• Earnings call highlights: (a) Volume growth in the first few days of Navratras was flattish, but HMCL is hopeful of 8-10% growth in festive season and full year (v/s earlier expectation of double-digit growth). (b) Rural markets are doing marginally better than urban. Expect stronger growth in rural in coming months. (c) Scooters 125cc segment grew ~77% in 1HFY19 for industry. HMCL's 125cc scooter (Destini) would be launched in week of 22nd October 2018 in one region; would take three weeks for pan-India launch. Second 125cc launch would be later. (d) Spare parts business grew ~24% YoY (~8% of sales v/s 7% of sales in 1QFY19/2QFY18). (e) Financing: No impact as yet from ALM issues faced by NBFCs. Hero FinCorp (~11% of HMCL volumes) is one of the key financiers (~36% of volumes are financed).