MOSL: HERO MOTOCORP (Nuetral)-Discounts, RM cost hurt margins-Guides for double-digit growth

​Hero motocorp: Discounts, RM cost hurt margins; Guides for double-digit growth

(HMCL IN, Mkt Cap USD10.7b, CMP INR3464, TP INR3622, 5% Upside, Neutral)

• EBITDA margin hurt by BS-III-related discounts and RM cost: Net revenue declined 7.9% YoY to ~INR69.2b (est. of ~INR68.4b), as volume/realization fell 5.8%/2.2% YoY. Realization of ~INR42.6k/unit (est. of ~INR42.2k) was impacted by discounts offered to liquidate BS-III inventory at ~INR1.9b (est. of ~INR1.6b). EBITDA margin shrunk 320bp QoQ (-200bp YoY) to 13.8% (est. of 16.3%). RM cost rose 240bp QoQ (360bp YoY) due to discounts (~190bp impact) and cost inflation (~50bp). Lower tax restricted PAT decline to 14% YoY (to ~INR7.2b v/s est. of ~INR7.8b). For FY17, revenues were flat, EBITDA margin expanded 60bp to ~16.3% and PAT grew ~7% to ~INR33.8b. FY17 dividend at INR85/share (v/s INR72 in FY16).
  
• Earning call highlights: a) Guided for double-digit growth in FY18, driven by good monsoon, rural recovery, infra spend and recovery post demon. HMCL targeting market share gain in scooters, led by product actions. b) Strong double-digit retail sales growth in FY18 YTD, leading to lower inventory at 4-5 weeks (normal levels at 5-6 weeks). c) Expects further increase in RM cost in 1QFY18 (over & above 75-100bp inflation in 4QFY17). HMCL has been taking adequate price increases (~1% each in 4Q and 1QFY18) to cover large part of cost inflation. d) New product launches: New 200cc motorcycle by 4QFY18. HMCL to launch six new products (incl. refreshes) in FY18. e) HMCL did not cut marketing spend or employee strength due to weak demand in 4QFY17. e) Capex guidance of INR25b over FY18/19 toward capacity expansion, upgradation, product development and digitization.