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Hero Motocorp Limited - Q2FY14 Result Update - "ACCUMULATE"




Kisan Ratilal Choksey Shares and Securities Private Limited


01 Nov 2013





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Hero Motocorp Limited - Q2FY14 Result Update CMP: Rs 2,043 Target Price: Rs 2,168 Recommendation: ACCUMULATE “Festive Season to bring cheer” Hero Motocorp’s Net sales was up by 10.4% on y-o-y to Rs.5726.2crs. EBITDA was up by 15.8% y-o-y to Rs.832.7cr. Margins improved slightly i.e. by 68bps y-o-y. Net profit increased by 9.3% y-o-y to Rs.481.4cr on the back of higher other income. Better Sales on Y-o-Y basis: Hero Motocorp recorded Net sales of Rs.5726.2cr which was up by 10.4% on y-o-y on the back of improvement in volumes up by 6.3% and increase in realization per unit by 3.9%. Sequentially sales were down by 7% on the back of weak volumes which were down by 9.2% which was offset by increase in realization by 2.4%. Total sales for the quarter stood at 14,16,211 vehicles and going forward we expect Hero Motocorp to maintain run rate of 5 lac+ vehicles per month. Stable EBITDA margins on y-o-y basis: Operating profit was up by 15.8% y-o-y to Rs.832.7cr mainly on account of cost saving initiatives taken up by the company. On q-o-q basis operating profit decreased by 9% due to weak sales volume. However operating margin was up on y-o-y basis by 68bps due to decrease in raw material cost. On sequential basis operating margin decreased marginally by 32bps to 14.5% v/s 14.9%. Disappointment on PAT margins front: Hero Motocorp’s Net profit increased by 9.3% y-o-y basis to Rs.481.4crs, however sequentially it was down by 12.2%. PAT margins were impacted mainly on the account of effective tax rate. The increase in tax rate was due to reduction in tax exemption benefit that the company was getting from its Haridwar plant which was prior 100% now it reduced to 30%. PAT margins were seen at 8.4% down by 50bps sequentially and were flat on y-o-y basis. Outlook & Valuations: We expect 2-wheeler industry to grow at 7-8% going ahead in FY13-14. We expect better growth in next quarter in volumes before the onset of festive season. However we believe FY15 will see growth returning in the two wheeler segment & we expect the industry to grow by 14-15% in FY15. We expect the recent spends by Hero on branding & the foray in to the export markets will help Hero reposition itself again in the domestic markets & establish itself in the export markets. However we expect the company to grow inline with the industry growth rate of 15% in FY14-FY15. At the CMP of Rs.2043 per share, Hero is trading at a PE of 17.6x FY14E & 15.08x FY15E. We recommend an Accumulate rating on the stock with a price target of Rs.2168 per share, implying an upside of 6% from the current levels.

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