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MOSL: HERO MOTOCORP (Neutral)-Op. performance above expectations on lower cost

HERO MOTOCORP: Op. performance above expectations on lower cost; expects recovery in 2H

(HMCL IN, Mkt Cap USD6.6b, CMP INR2259, TP INR2525, 12% Upside, Neutral)

 

• Margins above estimates; higher depreciation drags PAT: Revenue declined 9% YoY to INR80.3b (our estimate: INR81b). Realizations were up 4% YoY to INR43.6k (our estimate: INR43.9k) led by price hikes; however, lower spare sales hurt realizations sequentially (-1.6% QoQ). EBITDA declined 16% YoY to INR11.6b (our estimate: INR10.8b), with the margin expanding 80bp QoQ (-120bp YoY) to ~14.4% (our estimate: 13.3%). Higher depreciation restricted adj. PAT to INR7.2b (in-line; -21% YoY).
• Earnings call highlights: (a) Retail volumes declined 6% in 1Q. Inquiry levels are good, but demand deferment is a problem in both urban and rural (more in rural). (b) Inventory reduced by 3 days to 42-47 days (v/s 45-50 days in 4QFY19). This is including company level inventory but without sub-dealer inventory. (c) HMCL is hopeful of a demand recovery starting with festive season (end Sep'19); it thus expects 2H to be better than 1H. (d) <110cc scooter volumes declined ~23% in 1Q, whereas >125cc scooter volumes were up ~12% for the industry. (e) Company expects commodity cost tailwinds in coming quarters. (f) It took price hikes in Apr'19 and Jul'19 (0.8-1%). (g) Financing penetration is ~37% for HMCL, whereas Hero FinCorp has ~47% share of financing (v/s 42% earlier).
• Valuation view: We cut our FY21 EPS estimate by ~4% to factor in our reduced volume/margin assumptions. Near-term demand uncertainty, BS6 transition and increasing threat of electrification are likely to keep earnings and valuations under check. The stock trades at 14.5x/13.3x FY20/21 EPS, which is a fair reflection of flat EPS over FY19-21. Maintain Neutral with a target price of INR2,525 (~14x Mar'21 EPS + INR140/share for Hero FinCorp).