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Healthy performance, ASPs surprise positively - Hero MotoCorp Q2 Review

ICICIdirect Research 04 Nov 2022 DISCLAIMER

What's Buzzing 

Hero MotoCorp (HMCL) reported a healthy performance in Q2FY23. EBITDA margins for the quarter came in at 11.4%, up 20 bps QoQ. The company witnessed an 80 bps gross margin expansion QoQ. The benefits, however, were negated by higher other expenses, which were up 95 bps QoQ at 10.6% of sales. 

Context 

In Q2FY23, for HMCL, total operating income was at Rs 9,075 crore, up 8.1% QoQ with average selling price (ASP) coming in at Rs 63,545/unit, up 5.3% QoQ – the real surprise for the quarter. Sales volumes in Q2FY23 were at 14.3 lakh units, up 2.7% QoQ. EBITDA in Q2FY23 was at Rs 1,038 crore with consequent PAT at Rs 716 crore, up 14.7% QoQ. 

Our Perspective 

HMCL is the world's largest 2-W manufacturer by volume, with domestic market share pegged at 34.5% as of FY22. The segment, however, is witnessing faster than anticipated shift towards electrification. HMCL is approaching the EV space through both organic as well as inorganic routes. Organic route includes its captive electric-2-W i.e. VIDA V1 Plus & VIDA V1 Pro under VIDA brand, which was launched recently at ex showroom price of Rs 1.45 lakh and 1.59 lakh, respectively, which we believe to be on the higher side in terms of cost of acquisition from a customer standpoint. Some unique offerings at Vida include lower interest rate, extended trial period and assured buyback scheme among others. On the inorganic front, it is approaching electrification though its investments in Ather Energy (manufacturer of EV scooters) along with investment in Gogoro for battery swapping offerings/technology and Zero Motorcycles (premium electric motorcycles). The company is also planning to focus on the premium motorcycles space through its tie-up with Harley Davidson. Overall, we await more lucrative offering from the company in the EV space along with recovery in volumes from the rural market before turning decisively positive on the stock.

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