MOSL: HERO MOTOCORP (Neutral)-In-line results-GST leads to accounting changes-Lower other expenses drive margin beat

​(HMCL IN, Mkt Cap USD11.8b, CMP INR3816, TP INR3818, Neutral)

• Impact of higher RM cost offset by lower other expenses: Revenue increased 7.3% YoY to INR83.6b (est. of INR87b), as volume grew 10.9% YoY, but realizations declined 3.3% YoY to INR41.3k/unit (est. of INR43k). GST-led changes in accounting (for indirect tax at Haridwar plant and Spare sales) led to lower-than-estimated revenue of INR83.6b (est. of ~INR87b; +7% YoY). While gross margin of 31.9% (-160bp YoY, -40bp QoQ) was in-line, lower other expenses (due to GST accounting and lower CSR) boosted EBITDA margin by 110bp QoQ (-20bp YoY). EBITDA grew 6% YoY (+12% QoQ) to ~INR14.6b (est. of INR14.2b). However, lower other income and higher tax resulted in flat PAT of INR10.1b (in-line).
• Earning call highlights: a) HMCL indicated healthy volume growth in urban and rural markets, with similar growth since 2QFY18. b) HMCL witnessed strong double-digit retail growth across its portfolio in the festive season. c) It is awaiting clarification from the state to claim for the balance 42% CGST, which is not compensated by the center. d) Supply constraints for Glamour, which impacted volumes in 1HFY18, are addressed. e) Impact of loss of excise exemption at Haridwar (~100bp, partly in FY18 if states do not compensate) would be diluted by ramp-up at Halol plant and Andhra plant. f) Commodity price inflation to reflect in 2HFY18, but HMCL would take appropriate price increase (0.6% taken in last week of Sep-17).