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Hero MotoCorp Ltd. | Q3FY13 Result Update




IndiaNivesh Securities Pvt Ltd


17 Jan 2013





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Hero MotoCorp Ltd. | Q3FY13 Result Update | PAT below street expectation due to higher raw material cost and marketing cost | Hero MotoCorp reported Q3FY13 PAT below street expectation. Though, revenue increased by 3% y-o-y and 19.4% QoQ to Rs. 61.51 bn (slightly above consensus of Rs. 61.03 bn), on profitability front the company reported net profit of Rs. 4.8 bn vs. consensus of Rs. 5.8 bn. The Company’s top-line grew on the back of volume growth and better product mix. Volume increased by 18% q-o-q (decline of 0.8% YoY) to 1.57 mn during the quarter on the back of marketing initiatives, recovery in festive demand and healthy demand during the marriage season in December 2012 in the northern states. Average realization grew 3.85% QoQ and 1.17% YoY to Rs.39102 due to better product mix (slightly increase in volume of 150cc and 125cc motorcycles segment,). EBITDA margin stood at 12.58% (down 305 bps YoY & 128 bps QoQ) below consensus of 14.1% dragged by 135 bps QoQ increase in raw material cost (due to new launches) and 34 bps increase in other expenditure (due to higher marketing and advertisement cost). Management expects that Q4FY13 margin will improve due to favorable JPY/USD movement. Valuation: Hero MotoCorp has suffered a fall in operating margin on account of rise in marketing & selling expenses, due to high spend on ads and increase in the distributors’ margin with the objective to enhance brand awareness and win/maintain distributors loyalty. However, this loss should not be seen in isolation. In the last three months, the company has experienced recovery in volumes which is an important factor. Therefore, in the coming times, we expect the company to gain more on volume front which eventually is likely to support the margins. Hero MotoCorp has been losing its market share in two wheelers primarily to Honda Motor. However, recovery in volume growth in Q3FY13 is a big positive for the company. Given the likely dominance of first time buyers in incremental demand going forward, we see Hero Motocorp would emerge as a leader as it has all the relevant attributes that buyers will look for such as trusted brand (high recall), high mileage, economical, and large distribution reach. At CMP of Rs 1818 the stock is trading at PE multiple of 15.50x FY13E EPS and 14.40 x FY14E EPS which is lower than its mean of 18x. We have accumulate rating on the stock with target price of Rs. 2176 (based on 17xFY14 E earnings).

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