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MOSL: Hero MotoCorp (Buy) - Weak industry demand outlook drive 7% EPS downgrade




Motilal Oswal Securities Ltd.


03 Feb 2014





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Hero MotoCorp (HMCL IN, Mkt Cap USD6.4b, CMP INR2,000, Buy) Jinesh K Gandhi (Jinesh@MotilalOswal.com) / Chirag Jain (Chirag.Jain@MotilalOswal.com) 3QFY14 performance was below expectations Hero MotoCorps (HMCL) 3QFY14 performance was below expectations, with adjusted EBITDA margin of 9.6% (our estimate: 11%), driven by high other expenditure at 10.8% (our estimate: 9.7%). Net sales grew 11% YoY (20% QoQ) to INR68.5b (our estimate: INR67.7b), driven by 7% YoY (19% QoQ) volume growth to 1.68m (our estimate: 1.67m). Realizations grew 4% YoY (1.3% QoQ) to INR40,727/unit. PAT grew 7.5% YoY (9% QoQ) to INR5.25b (our est: INR5.96b). Partial expiry of tax benefits on Haridwar plant led PAT growth to be lower than 17% EBITDA growth. Earnings call highlights Demand has slowed down post festive season, with channel inventory high at 6-7 weeks. Despite the weak demand environment, ad spends would remain at 2-2.5% of sales. 3Q ad spends are higher seasonally due to festive season. Impact of loyalty schemes (discounts offered in Dec-13) was minimal. Cost improvement project is on track, with 70bp benefit in 3Q. HMCL aims at ~300bp margin expansion to ~17% by FY17. Cutting earnings estimates; maintain Buy We downgrade FY14E/15E/16E EPS by 7%/7%/5.5% to INR105/144/177 to factor in pressure on volumes, led by weak industry demand outlook and consequent pressure on margins. Current valuations at 13.9x/11.3x FY15E/FY16E EPS and dividend yield of 3.3%/3.8% for FY15E/16E appear attractive. Maintain Buy with a target price of INR2,472 (14x FY16E EPS).

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