MOSL: HERO MOTOCORP (Neutral)-GST compensation, RM hurt margin-Volume guidance slightly lowered

​Hero MotoCorp: GST compensation, RM hurt margin; Volume guidance slightly lowered

(HMCL IN, Mkt Cap USD11.5b, CMP INR3707, TP INR3818, 3% Upside, Neutral)

• GST-related dealer compensation and higher RM cost impact margins: Revenue increased 7.7% YoY to INR79.7b (est. of INR80b) as volumes grew by 6% YoY and realizations by 1.7% YoY to INR43.1k/unit (est. of INR43.3k). Higher RM costs due to commodity inflation and lower spare sales, and dealer compensation of ~INR500m impacted EBITDA by ~60bp. However, the impact of cost inflation was diluted by lower marketing spend. EBITDA margin contracted 30bp YoY (+250bp QoQ) to 16.3% (est. of 16.9%). PAT grew 3.5% YoY (+27% QoQ) to INR9.1b, boosted by higher other income.
• Earning call highlights: a) FY18 industry growth outlook lowered to higher-single-digit (v/s double-digit growth expectations). b) HMCL indicated that urban markets grew faster than rural in 1QFY18. c) Most of RM cost inflation is in numbers, which was largely passed through price increase of 1-2% in May-17. d) Impact of loss of excise exemption at Haridwar (~100bp) would be diluted by ramp-up at Halol plant (having sales tax incentive). e) ‘Glamour’ volume was impacted by supply constraints, which are now easing. f) Spare parts sales, which were impacted in 1HCY17 in anticipation of GST roll-out, are expected to recover in the coming quarters.