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  • CMP : 5,785.0 Chg : 36.50 (0.63%)
  • Target : 2,495.0 (3.44%)
  • Target Period : 12-18 Month
Result Update

04 May 2022

Muted show, all eyes on captive EV launch in July…

About The Stock

Hero MotoCorp (HMCL) is the world’s largest 2-W manufacturer by volume, with domestic market share at 34.5% as of FY22. Its suite of popular models includes Splendor, Passion, Glamour, etc.

  • Rural geographies form ~50% sales; 48.3% FY22 motorcycle market share
  • Debt-free b/s with strong return ratios; healthy >50% dividend payout ratio
  • On ground EV presence currently limited to ~35%+ stake in Ather Energy
Q4FY22

The company reported a muted performance in Q4FY22.

  • Revenues were down 5.9% QoQ to with volumes declining 8% QoQ
  • EBITDA margins came in at 11.2% in Q4FY22, down 100 bps QoQ
  • Consequent standalone PAT was at ₹ 627 crore, down 8.6% QoQ
What should Investors do?

HMCL’s share price has lagged the Nifty Auto Index in the past five years, de-growing at           ~6.6% CAGR from ~₹ 3,275 levels in May 2017.

  • We retain HOLD amid faster than anticipated EV transition domestically and await firmer EV commitment by HMCL
Target Price Valuation

We value HMCL at revised target price of ₹ 2,495 (12x P/E on FY24E EPS & 2x P/B to its long term strategic investments in FY24)

Key Triggers for future price performance
  • Post ~15% decline in FY22, expect volume to grow at a CAGR of 8.0% over FY22-24E, driven by need for personal mobility. Revenues are seen growing at an 12.9% CAGR over FY22-24E with EBITDA margins at ~12-13%
  • Exports, scooters and Harley tie-up to aid diversification & product mix
  • Own EV launch by July 2022, prominent presence in Ather along with partnership with Gogoro would complement presence in EV space
  • Cash rich b/s, high dividend yield (~4%) to provide margin of safety
New Stock Ideas

Besides HMCL, in our auto OEM coverage, we like M&M.

  • Focused on prudent capital allocation, UV differentiation & EV proactiveness

 

  • BUY with target price of ₹ 1,045

Particulars

Particulars (₹ crore) Amount
Market Capitalization 115,739.3
Cash & Investment (FY22P) 8,013.0
Enterprise Value 40,155.0
52 week H/L (₹) 6,388.5/3,344.0
Equity Capital 40.0
Face Value (₹) 2.0

Price Chart

Recent Events & Key Highlights

  • Posted muted Q4FY22 results
  • Key Risk: (i) Competitive, superior technology driven entry into the EV race (ii) Slower than anticipated pickup in volumes

Research Analyst

Result Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22P 5 year CAGR (FY17-22) FY23E FY24E 2 year CAGR (FY22-24E)
Net Sales 33,650.5 28,836.1 30,800.7 29,245.5 0.5 34,643.5 37,258.3 12.9
EBITDA 4,929.8 3,958.0 4,019.2 3,368.7 -6.2 4,315.1 4,861.9 20.1
EBITDA Margins (%) 14.6 13.7 13.0 11.5 - 12.5 13.0 -
Net Profit 3,384.6 3,633.3 2,964.1 2,472.9 -6.0 3,118.3 3,520.8 19.3
Normalised Net Profit 3,384.6 3,202.6 2,964.1 2,472.9 -6.0 3,118.3 3,520.8 19.3
EPS (₹) 169.5 181.9 148.4 123.8 - 156.1 176.3 -
P/E 14.2 13.3 16.3 19.5 - 15.4 13.7 -
RoNW (%) 26.3 22.7 19.5 15.7 - 18.7 19.9 -
RoCE (%) 32.0 21.3 20.8 16.3 - 20.7 22.2 -
Source: Company, ICICI Direct Research

Key takeaways of the recent quarter & Concall highlights

Q4FY22 Results:

  • Blended ASP for the quarter were at ~ | 62,426/unit (up 2.3% QoQ).
  • EBITDA in Q4FY22 was at | 828 crore, down 13.8% QoQ with corresponding EBITDA margins at 11.2% (down 100 bps QoQ). The company witnessed a 170 bps gross margins expansion on a QoQ basis. Benefits, however, were limited due to higher overhead costs
  • PAT for the quarter came in at | 627.1 crore, down 8.6% QoQ
  • The company is on track to roll out its own EV product on July 1, 2022             

Q4FY22 Earnings Conference Call highlights

  • HMCL remains optimistic about domestic demand. Further recovery seen in entry level segment with improvement in market share
  • HMCL EV’s unveil to continue as planned and will not be impacted due to chip shortage and would focus on quality & safety features. Further, launch of EV would not be impacted by ongoing government study related to EV fires
  • Gross margin expansion was due to commodity cost flattening in Q4FY22 along with price hikes. Going forward, the management intends to increase margin through cost savings occurring due to operating leverage benefits as well as premiumisation of vehicles
  • The management foresees demand to be healthy in FY23 riding on the back of strong marriage season and a pick-up in rural demand
  • Inventory remained low at six to seven weeks as of April, 2022 vs. ~seven to eight weeks as of March 2022 led by healthy retails due to Gudi Padwa & success of mileage campaign launch in March 2022 due to which models like Splendour witnessed good traction in demand
  • Average price hike taken was ~|1,000 ex-showroom in April 2022. Price hike are taken cautiously to maintain demand as well as to maintain margins.
  • On EV front company plans to launch 2 products one under its own brand and one along with partnership with Gogoro, in FY23.
  • Investment in Ather was ~|150 crores in Q4FY22 with total investment planned at |420 crores with balance |270 crores to be invested in Q1FY23.
  • Spares revenue stood at |1,151 crores for Q4FY22 vs |1,186 crore in Q3FY22 with annual run-rate at ~13.5% of revenue.
  • First time buyers account for ~65-70% of portfolio with replacement and additional buyers forming the rest (equally divided). Retail financing penetration was at ~54% during Q4FY22 with annual penetration at >50% vs. ~49% in FY21. Hero FinCorp share in financing was at ~34%

  • Management guided about various exciting product launch in scooter as well as motorcycle segment to recapture lost market share. 

  • Management intends to grow double digit in volumes in FY23E and gain market share vs. peers

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I/We, Shashank Kanodia, CFA, MBA (Capital Markets), and Raghvendra Goyal, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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