MOSL: Hero MotoCorp (Neutral)-In-line results - higher other expenses dent EBITDA margin

Hero MotoCorp: In-line results; higher other expenses dent EBITDA margin

(HMCL IN, Mkt Cap USD11.0b, CMP INR3662, TP INR4052, 13% Upside, Neutral)

• Higher other expenses impact margins: Revenue rose 23.7% YoY to INR85.6b (in-line) in 4QFY18. Realizations were flat YoY/QoQ at INR42.8k (in-line) due to price hikes. While the gross margin was in line at 32.4%, higher other expenses (due to higher marketing spends) led to a miss on the EBITDA margin (16% v/s estimate of 16.7%). PAT grew 35% YoY to INR9.7b (est. of INR9.8), led by higher other income. For FY18, revenue grew 13.1% to INR322b (with volume growth of 13.9% and realization decline of 0.7%), EBITDA margin was flat at 16.4% and PAT increased 9.5% to INR36.9b. HMCL announced a dividend of INR95/share for FY18 (v/s INR85 for FY17).
• Earning call highlights: a) HMCL indicated double-digit growth for 2W industry in FY19, driven by continued momentum in rural markets. b) Its initiatives in the executive 125cc and scooter segments have helped to partly recover the lost market share. c) Average price hike of INR300 taken from Jan-18 to Apr-18. d) Haridwar plant incentive expiry to impact margin by ~60bp from 1QFY19; ramp-up at Halol (100% increase in production in FY19 to 600k) and commissioning of AP plant (2HFY20) to dilute this impact in FY20. e) Expect RM inflation impact from 1QFY19 (~100bp impact in FY18). f) Spare revenue grew 12.9% to INR26.4b in FY18.