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Hero MotoCorp | Q2FY14 Result | Above street expectations




IndiaNivesh Securities Pvt Ltd


23 Oct 2013





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Hero MotoCorp Ltd. | Q2FY14 Result Update Above street expectations Hero MotoCorp reported Q2FY14 numbers above street expectation. Revenue increased by 10% YoY (down 7% QoQ) to Rs. 57.26 bn (slightly higher than consensus of Rs. 56.32 bn) due to higher volume and slight increase in realization. On profitability front net profit increased by 9% YoY (down 12% QoQ) to Rs. 4.81 bn (vs. consensus of Rs. 4.67 bn) due to better than estimated operating margin on back of cost control measures. On operational front, total volume increased by 6% YoY (down 2% QoQ) to 1.41 mn during the quarter due to higher scooter sales. Average realization grew 4% YoY and 2.4% QoQ to Rs. 40221 due to products price hike. EBITDA margin stood at 14.54% (down 32 bps QoQ and up 68 bps YoY) above consensus of 13.5% due to decrease in raw material cost. Though there was a partial impact of unfavorable USD/JPY in Q2FY14 on vendor imports due to lag impact, we expect that full adverse impact would be seen in Q3FY14. Management expect that margin pressure would be seen in coming quarters due to higher commodity prices and that would be partially offset by price hike (1-5 to 2%) in the month of October 2013. The management also pointed out that retail volume for the company increased by more than 7% YoY in Q2FY14 vs wholesale volume of 6%. Also it expects single digit growth in H2FY14 vs. flat growth in H1FY14 on the back of good monsoon and festive demand. Valuation: Though margin pressure would be seen in coming quarters due to higher commodity prices and unfavorable USD/JPY movement, revival in rural demand on the back of strong monsoon 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 commands 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 2,088 the stock is trading at PE multiple of 15.7x FY15E EPS which is lower than its mean of 18x. We maintain accumulate rating on the stock with target price of Rs. 2,176.

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