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MOSL: HERO MOTOCORP (Buy) -Above estimate led by higher margins - demand outlook healthy




Motilal Oswal Securities Ltd.


24 Oct 2013





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Hero MotoCorp (HMCL IN, Mkt Cap USD6.8b, CMP INR2,088, Buy) Jinesh K Gandhi (Jinesh@MotilalOswal.com) / Chirag Jain (Chirag.Jain@MotilalOswal.com) Strong performance, stronger outlook Hero MotoCorp’s (HMCL) performance was above estimate, with adj. EBITDA margin of 10.4% (v/s est. 9.7%), driven by ~2.3% QoQ improvement in realizations. Net sales stood at INR57b (v/s est. INR56.7b) on 6.3% YoY volume increase to 1.42m units (est. 1.44m). EBITDA margin at 10.4% improved 140bp YoY (down 70bp QoQ) led by RM cost decline of 120bp YoY (decline of 80bp QoQ) on favorable mix and higher spare parts revenue. PAT grew 9.3% YoY to INR4.8b (est. INR4.4b); beat driven by higher-than-estimate EBITDA. Earnings call highlights: 1) HMCL witnessed 7% YoY retail sales growth in 1HFY14, 2) festive sales flattish for industry but expects momentum to pick up during month-end with Dhanteras and Diwali, 3) expects growth in festive retails despite high base, 4) low single digit growth guidance for FY14, 3) rural continues to outpace urban; rural sales at 47% for HMCL, 4) inventory and promotional schemes under control, 5) expects INR600-800m cost rationalization benefit in 2HFY14; INR15-17b annually FY18 onwards, 6) average price hike of INR1,000 effective Oct-13 to partially offset RM cost pressures and 7) new capacity at Rajasthan of 0.75m units to come on stream by end-4QFY14. Upgrade FY14E/15E EPS by 6% maintain Buy: We upgrade FY14E/15E EPS by 6% to INR117/162 to factor the cost savings of ~INR0.7b each in FY14E/FY15E. Current valuations at 17.9x/12.9x FY14E/FY15E EPS and dividend yield of 3.4% for FY14E/15E appear attractive. Maintain Buy with a target price of INR2,425 (15x FY15E EPS).

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